How to rebuild credit after bankruptcy
After bankruptcy, your credit score will be reduced, and your credit history will reflect the discharged debts. Starting to rebuild your credit may seem like an uphill battle, but rather than becoming overwhelmed, focus on taking one step at a time.
Why rebuild credit?
Your credit score is used by lenders, employers, utility companies and others to determine whether or not to move forward with your application (for a loan, a credit card, a job, a phone plan, and more). The lower your credit score, the more likely you are to have to pay a higher interest rate, require a co-signer on your loans, or even be declined for credit. On the other hand, a higher credit score demonstrates your ability to faithfully repay bills and debt on time, so you’re more likely to be approved for credit and receive lower “prime” interest rates.
Rebuilding your credit after bankruptcy does take time, but with consistent effort you can demonstrate your creditworthiness and trustworthiness moving forward.
Here are 6 steps to rebuild credit after bankruptcy:
1. Set a budget
Even if you’re experiencing a reduced income, you can create a budget that works. Having a functional budget means you’ll know how much money is coming into your account each month, and how much money is going out. When your budget is balanced, you won’t be falling behind on debts and you’ll have enough money to cover all of your payments –ideally, you’ll have room for savings as well, which can help you stay on top of payments even if the unexpected happens. Once you set your budget, only spend within your means; this way you’ll ensure you have enough money to pay your bills on time.
2. Automate any remaining payments
Avoid the mistake of late or overdue payments by automating any remaining payments that you have. Rent, mortgage, utilities – all of these bills can be automated so you won’t have to remember what day they need to be paid on. We recommend aligning automated payments with your payday, so your bills are taken care of before you’re even tempted to spend the money elsewhere. As you continue to make on-time payments, your credit report will be updated to show your new payment behaviour and your credit score will begin to improve.
3. Set up a savings account and start saving
If you didn’t have a savings account before, it’s time to establish some savings. Banks and other lenders like to see you are able to have a balanced budget that includes savings, as it shows you’re not walking a fine line with overspending. The more you can demonstrate your ability to set aside money and live within your means, the more likely you are to be approved for lower-interest debt in the future.
4. Apply for a secured credit card
You’ll want to have at least one open credit product on your credit report and use it to demonstrate your ability to make payments on time, every time. A secured credit card is probably your best bet, as lenders will feel more comfortable when you put a deposit (money) down against the card to protect them in case you don’t pay. Once you have the card, focus on making one or two small purchases each month using the card, which you pay off in full before the bill is due. This type of positive payment behaviour will improve your credit score over time.
5. Avoid applying for credit too frequently
Once you’re in a good place with your secured credit card and your credit score is improving, you’ll probably be able to access unsecured debt like an unsecured credit card or an installment loan. When you’re ready, consider taking out another one of these products to demonstrate that you can manage multiple debts and still make all of your payments on time. But, be mindful – you’ll want to space out applications for credit products, so it doesn’t seem like you’re showing “credit-seeking behaviour”, which is a red flag for credit reporting agencies. Every application is reported to your credit bureau, and more than two credit applications in a six-month window can actually reduce your credit score.
When you’re thinking about applying for a new credit product, look for companies that can offer you a quote or estimate without a hard credit check. If you don’t qualify for their product based on the quote, it won’t negatively impact your credit.
6. Register for credit score monitoring
You’ll want to know how your credit-building efforts are paying off, so make sure to sign up for credit reporting either through the Canadian credit bureaus (Equifax and TransUnion) or a third-party provider you trust. Don’t be put off if it takes a while for your credit history to improve; remember, you’re playing the long game of coming back from bankruptcy, so changes will take time. Try checking your credit report every three or four months, and at least every year, to ensure the report is accurate and to watch how your score changes over time.
Although these are six suggested steps to rebuild credit after bankruptcy, there are many more methods to do so. As long as you focus on making on-time payments consistently, demonstrating that you can live within your income and avoid accruing debt that you cannot pay, your credit will improve. It may take years, but even those who have been bankrupt can achieve good or excellent credit scores over time.
Are you interested in using an installment loan product to demonstrate strong payment behaviour and improve your credit score? Check out our personal loan options here.