You Ask. Bev Answers: How Can I Reestablish Healthy Credit Habits After Bankruptcy?
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In a time of great uncertainty, a voice of knowledge and reassurance can make all the difference. Beverly Anderson, President of Global Consumer Solutions at Equifax, answers your questions based on her years of experience in the consumer finance industry. You can post a question for Bev on Equifax's Facebook page. Bev regrets that she cannot answer every question individually.
Question: I'm in the process of filing for bankruptcy and will likely go through a foreclosure next year. I'm worried about the long-term effects on my credit history. What, if anything, can I do to minimize the negative impact?
Answer: I'm sorry you're going through this right now. Unfortunately, there are credit repercussions that go along with filing for bankruptcy or going through a foreclosure.
Both have a long-term negative impact on your credit scores. By long-term, I mean that a Chapter 13 bankruptcy or foreclosure will stay on your credit reports for up to seven years, while a Chapter 7 bankruptcy will remain for up to 10 years.
That's not to say your credit history can't improve after you've gone through those financial setbacks. Some people might find that their credit scores rise after their bankruptcy is discharged. The good news is after bankruptcy or foreclosure, you can immediately take steps that can have a positive impact on your credit history:
- Pull a copy of your credit reports and VantageScore credit scores. You're entitled to a free copy of your credit reports every 12 months (weekly through April 2021 in response to the Coronavirus/Covid-19 pandemic) from each of the three nationwide consumer reporting agencies (Equifax, Experian and TransUnion) by visiting AnnualCreditReport.com. You can also create a myEquifax™ account to get six free Equifax credit reports each year. In addition, you can click "Get my free credit score" on your myEquifax dashboard to enroll in Equifax Core Credit™ for a free monthly Equifax credit report and a free monthly VantageScore® 3.0 credit score, based on Equifax data. A VantageScore is one of many types of credit scores.
- Ensure your credit reports are accurate. The accounts that were discharged in bankruptcy or foreclosure should be closed. If that information is not updated on your credit history, your credit scores may be penalized more than necessary. If you see something you believe is inaccurate or incomplete on your credit reports, contact your lender or creditor first. You can also file a dispute with each of the three nationwide consumer reporting agencies for free. For more information on filing a dispute with Equifax, click here.
- Prioritize making future payments on time. It sounds simple, but on-time payments and responsible credit card use can significantly help you recover from bankruptcy. Credit score providers will usually place more emphasis on events that happened in the past 24 months. Therefore, if you keep your open accounts in good standing, your credit scores could potentially improve within two years.
- Open a new line of credit. After some time has passed and you feel financially stable, consider opening a new line of credit with a reputable lender to reestablish healthy credit habits. Although some lenders may be hesitant to extend credit with a bankruptcy or foreclosure on your record, others may be willing to work with you.
If you're having difficulty qualifying for a new line of credit in the short term, consider these alternatives:
- Become an authorized user on someone else's credit card account. An authorized user is allowed to make purchases with a credit card but is not responsible for making the payments. Assuming the primary owner of the account makes their payments on time, you can expect a small bump to your credit scores. The benefit to your credit history may not be as helpful as if you were the primary cardholder, but it is still a relatively low-risk way to improve your credit scores.
- Have someone cosign a loan or new credit card. While it may be hard for you to take out a loan or open a credit card by yourself, someone with higher credit scores may be able to cosign with you. As long as your payments are on time, your credit scores will likely improve. However, if you make late payments, your and your cosigner's credit scores will likely both suffer.
- Apply for a gas station or local retail store credit card. Gas station and local retail store credit cards are typically easier to get approved for after bankruptcy. Once you have a history of making timely payments, other credit opportunities may become available.
- Consider working with a reputable credit counseling agency but avoid credit repair companies. The likely best way to improve your credit scores is through responsible borrowing and repayment of debt, so beware of scams. Some credit repair companies, for example, may take advantage of your situation and—for a fee—offer a "quick fix," claiming to erase negative events like bankruptcies from your credit reports or create a new credit identity for you. More often than not, you'll end up losing time and money, and may even face legal consequences. Instead, consider working with a reputable credit counseling agency that can present you with viable options such as a debt management plan.
Your credit scores won't rebound overnight after a bankruptcy or foreclosure. However, if you use credit responsibly and avoid late payments, you can establish a favorable credit history over time and get back on solid financial footing.
Beverly Anderson is the President of Global Consumer Solutions at Equifax. She is responsible for the strategy, development, growth and profitability of direct and indirect businesses serving consumers with credit, identity and financial education products and services.
For more than three decades, Beverly has built businesses and delivered significant results in the financial services and payments industries. She drove consumer and small business strategies, product strategies, and enterprise growth and profitability strategies for First USA (now JPMorgan Chase), Fleet (now Bank of America) and American Express. Before joining Equifax, she was the Executive Vice President of Cards and Retail Services at Wells Fargo where she led consumer credit cards, co-branded cards, loyalty solutions, retail finance, digital payments and enablement capabilities. She has also held leadership roles managing auto loans, personal lines and loans, servicing, loan operations, collections and fraud operations. https://www.equifax.com/about-equifax/corporate-leadership/beverly-anderson/