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How to rebuild your credit score after bankruptcy

People often unfairly view bankruptcy as something that will destroy their credit. While bankruptcy does drag down your credit score and affect the caliber of credit offers that people receive for several years after their filing, bankruptcy can do far more good for your credit in the long term than it does harm in the short term.

Many people file for bankruptcy in response to creditor actions, like the filing of a civil lawsuit. The automatic stay you receive when you file gives you short-term relief from collection activity. The discharge you receive when the courts finalize your bankruptcy will free up possibly hundreds of dollars a month previously allocated to unsecured debt like credit cards.

At that point, you will be in an ideal situation to begin rebuilding your credit to make it even better than before.

Start small but as soon as possible

After your discharge, you will probably start receiving offers from credit card companies. They know that you need credit and also that you can’t file for bankruptcy again for years, meaning you could potentially be a great source of fees and interest.

While such credit offers typically come with mediocre terms and even a requirement for a cash deposit, the sooner you establish a small revolving line of credit, the sooner you will have a history of making payments on time.

Make on-time payments, keep your balances low

Your goal with a credit card should be to maintain a low balance while using it every month. Paying it off in full every month is also an important habit to establish. Eventually, as your credit score creeps up due to your frequent on-time payments, you will start receiving better credit card offers with lower interest rates, higher limits and even reward benefits.

The goal is to always pay off your balance in full to avoid a slowly building amount of credit card debt. Adding new accounts will reduce the average age of each account and increase your risk of balances getting too high, so do so only with careful consideration.

Increase and diversify your lines of credit as your score improves

It will usually be a year or longer before people can qualify for bigger purchases and several years after bankruptcy before you can qualify for decent terms on those bigger lines of credit. Upgrading to better credit cards and possibly financing the purchase of a vehicle can give you several larger lines of credit to continue establishing a good payment history.

By the time your bankruptcy comes off of your credit report, your score should be enough for you to qualify for excellent terms, provided that you prioritize timely payments and keep your balance is low. Rebuilding your credit can be one of the best effects of filing for personal bankruptcy, especially if your high levels of debt currently keep you from qualifying for great credit terms.