Bankruptcy is a tough situation to go through as a small business owner, and all your hopes might have been washed away with it. If you just filed for bankruptcy, you should know that, like any other bad experience in life, you can always learn from it and move on. Stay with us to guide you through a series of steps to rebuild credit.
While filling for bankruptcy can hurt severely your credit score, contrary to what most believe, there’s always a way to recover from it. If you’re still planning to continue with your projects and business, it is even more important that you take the right steps.
Rebuild credit after a bankruptcy
But, why should you rebuild credit after bankruptcy?
The answer is simple, if you ever want to have access to loans in the future or any other type of credit, you should definitely do it. Otherwise, you won’t be able to move forward due to your bad history. In case you are not fully aware, a bankruptcy will appear on your credit history from 7 to 10 years, depending on the type of bankruptcy.
8 ways to rebuild credit after a bankruptcy
You don’t need to wait 10 years for the bankruptcy to disappear from your credit history, you can start fixing your credit score from now with these few action steps:
1. Check that your credit report doesn’t have any mistakes
There’s something you should know: as official as they seem, credit reports can have mistakes.
That’s why you must check your credit reports for any inaccuracies. These mistakes can go from misspellings on your name or address, to actual payment history information.
Verify that the affected accounts are discharged by bankruptcy, the balance should be $0 and the date should be correct. Remember they will be there for around 10 years, so you want to have the correct date. If you spot any mistakes, don’t wait for even a second and report all the inaccuracies. That way, next time you apply for a loan, you won’t have any problems.
2. Pay bills on time
The best way to rebuild your credit after a bankruptcy is to start having a healthy financial behavior and pay your debts on time.
Learn from your mistakes and administrate your current debts properly. If you have any outstanding debts and that were not filed for bankruptcy, make sure you still pay them on time, as they will still have an impact on your credit score. These bills could be your house rent or mortgage. Even the accounts that do not appear on your credit reports can help in the future.
3. Get your payments reported on the credit bureau
Not all your monthly payments are directly reported to a credit bureau. Some banks or financial institutions do send information once a month or so, but not to all 3 credit bureaus. Try to find a bank that does report to all three credit bureaus.
You can too ask, for example, to your landlord to report your monthly payments.
4. Make a budget
Once you assessed the situation that got you into bankruptcy, you must learn to manage your finances. Creating a budget can come in handy to recover from this fall and can help you rebuild credit.
5. Get a Secured Card
A secured credit card is like the training wheels of an unsecured credit card. This type of card allows you to give a security deposit and that’s the amount you’ll have to spend during the month (minus the card fees). Let’s say you add $200, and you pay a $19 fee, which means that you have $181 to spend.
You can use this card to make small purchases throughout the month. Make sure you pay the account on time and to keep your balance low.
There are two things that you have to keep in mind:
- Your secured credit card application can be rejected, so make sure you read the requirements carefully.
- Not all the secured cards report to the 3 major credit bureaus, make sure that the one you choose does, otherwise, you’ll be wasting time and energy.
6. Get a credit-builder loan
A credit-builder loan can also help you securely build credit. A credit-builder loan is kind of a savings account, you pay monthly installments and only when you finish paying it can you use the money.
However, you should know that this kind of loan is only available for small amounts of money and short periods. Although, for a bankruptcy situation, it’s perfect because you’re only using it to improve your credit score.
Make sure to research which institutions offer these loans and that they provide your payment information to the main credit bureaus.
7. Co-sign a credit card or loan
If you know someone who has good credit, preferably a really good friend or family member, you can ask them to co-sign a loan or a credit card with you. However, you should be very careful, as this person will be taking responsibility if you don’t pay on time or don’t pay at all, and their credit could be affected.
Asking someone to co-sign is a big deal and something that has to be discussed seriously as it could damage your relationships if you don’t pay as agreed.
8. Become an authorized user of a credit card
If co-signing is too much of a big deal, you can also ask to become an authorized user on someone else’s credit card. It’s still a big ask, as you would be authorized to use somebody else’s good credit to help yours, and if you fail to pay, this person would get in trouble, as you are not legally obliged to pay the card.
Make sure that the account owner reports the payment history to the credit bureaus under your name so that you can rebuild credit. But be careful, if the account owner also fails to pay, your credit score will be affected as well. It’s always better to communicate clearly, set expectations and build trust before getting into this.
Bankruptcy is not the end of the world
As you can see, there are many ways in which you can rebuild credit even after bankruptcy.
Though bankruptcy can be emotionally and financially challenging, there is always a solution. You should keep in mind that learning from your past mistakes will help you on your entrepreneurial journey.
So, take time to assess your situation, review your credit reports to spot issues, pay your other bills on time, make a financial plan and do any of the other credit-building actions like getting a secured card.
Like anything else, it will take some time to recover, but you’ll get there.
If you’d like to receive more tips to build a strong credit, or ways to grow your business, subscribe to the Camino Financial Newsletter and join our community of small business owners.