How a Chapter 7 Discharge Affects Your Credit Score
Chapter 7 bankruptcy can take a huge toll on your credit rating, but luckily by the time your debts are discharged you’re in a better financial position than before. You’ve hopefully also gained the budgeting and planning skills to make recovery possible. The basic steps for rebuilding credit are simple; they just require some patience and discipline. Following are some options for acquiring loans and strategies for making the most of them.
Recording Credit Builder Loans
This is a very basic type of loan whose sole purpose is to build your credit. They’re usually offered by small community banks and credit unions. How it works is: you apply for a loan and are approved, but the amount of the loan is deposited in an account. You then make monthly payments determined by the length of the loan, and the bank reports those payments to credit rating agencies, boosting your score. Since there is no risk to the financial institution, approval is very likely. Any missed payments would be reported as well, so make sure you never miss any.
Reporting Secured Loans and Credit Cards
These options work similarly. Cash is deposited in a savings account or CD and a loan is issued equal to the amount of the deposit. You usually won’t be able to access the money until the loan is paid off, but each payment will be reported to the credit agencies so your credit will improve. Your money will continue to earn interest while in the savings account or CD, and because the risk is low to the lender, the interest rate on the loan will be very low.
Rebuilding With Unsecured Loans and Cards
After your credit has been rebuilt somewhat, you’ll be able to apply for an unsecured credit card or loan. Because your score will likely still be low and the bankruptcy still on your report, your options will be limited. The best place to start is with the bank that held your secured loan or credit card. They have experience with you as a customer and are more likely to approve you. Store cards (retail credit) are other easy-to-obtain cards because they can only be used at the store that issues them, limiting the risk of them being misused. Be aware, though: interest rates tend to be very high on these cards so carrying a balance is especially harmful.
Rebuilding With Payment Strategies
Initially, you’ll want to make every payment in full every month. Especially on secured cards and loans, this is vital. Once you’ve obtained an unsecured loan, experts recommend not using more than 30% of your available credit limit and paying it off every month in full. After a year of doing this, you can call your financial institution and request an increase in your credit limit. At this point, some people find it beneficial (and some experts recommend) carrying a small balance from month to month. If this is the route you choose, the balance should not be more than 20% of your available credit.
These steps take some time, up to three or four years, to fully take effect. Your patience and diligence will be worth it when you see your credit score increase by up to 100 points.