Many people in debt are hesitant to file for bankruptcy, fearing that doing so will ruin their credit. While bankruptcy can temporarily lower your credit score, it is likely it will go up soon thereafter.

With your debts discharged, you can finally silence creditors for good and start building wealth again with a clean slate. Imagine how much money you’d have if you took the money you use to make credit card payments and invested it each month over twenty or thirty years. Here’s more on how bankruptcy can impact your credit and ways you can improve it after filing.

How Does Bankruptcy Impact Your Credit?

To build healthy credit, you must have a good payment history. Your credit score begins to suffer when you continuously fall behind on payments. If you still can’t get ahead and decide to file for bankruptcy, while you might get a slight credit ding in the short run, in the long run your credit score can rise dramatically.

Your credit score is impacted by many variables, but the top three include:

  1. Your debt-to-income ratio (or the amount of debt you have vs. the amount of money you earn each year)
  2. If you own a house and make on-time payments, that has a positive effect
  3. Your available credit on all your credit cards, lines of credit and so on.

Additionally, the impact on your credit depends on the type of bankruptcy you file. A chapter 7 bankruptcy remains on a credit report for ten years, and a chapter 13 bankruptcy stays on your report for seven—but don’t let that alarm you.

Although your bankruptcy remains on your credit report, you’ll finally be able to stay current on your bills since you’re no longer in debt. More importantly, your debt-to-income ratio dramatically shifts as your debt decreases and your income increases. Getting rid of that debt is key, and choosing not to file for bankruptcy could actually cause more damage to your credit in the long run.

How to Rebuild Your Credit After Bankruptcy

Although you might be concerned about your credit after filing for bankruptcy, all is not lost. There are several ways you can recover from bankruptcy, including the following:

Keep a Close Eye on Your Credit

To ensure that you’re making progress on rebuilding your credit score, you should check on it periodically. Further, it’s wise to check your credit report to understand the factors determining your overall credit score.

This helps you to be more strategic when improving your credit score by focusing on the things that work and eliminating what doesn’t. Additionally, when you regularly check your credit report, you can easily identify errors that may indicate theft.

Additionally, after filing you will get several credit card offers online and in the mail. And while your may think “I will never get another credit card again,” it’s actually not a bad idea to start rebuilding your credit. In a few years those $500 credit limit cards will be at a $5,000 limit and your credit score will increase.

Be Prepared for Unexpected Bills & Limit Credit Card Use

If you want to rebuild credit after your bankruptcy, it’s vital that you identify the reasons why you had to file in the first place. There’s a common myth that those who file for bankruptcy are financially irresponsible. However, particularly with what we’ve all gone through with Covid, anyone has the potential to find themselves in a financial crisis.

You might have overdue medical bills from a severe accident, or you lost your job. Whatever the case may be, it’s important to ensure you always have an emergency fund at your disposal to help cover unexpected bills. An emergency fund also prevents you from opening new lines of credit or overusing your current credit card, both of which can negatively affect your score.

Pay Your Bills on Time

As mentioned above, past-due payments are one of the driving factors that make up your credit score. In fact, payment history accounts for 35% of your FICO score. That’s why it’s crucial to make payments on time if you want to see a significant improvement in your overall credit.

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