Your credit report is an official record of how you’ve used and managed credit (borrowed money) in the past. Every time you apply for a loan, lenders examine your report or credit score to assess your “financial reputation.” That’s really what the information in your credit file is – a listing of your financial history and an inference of how you will repay future debt. Bankruptcy severely damages your financial reputation.
- When your financial reputation is good, lenders will want to lend money to you and will offer you the lowest available interest rates.
- When your financial reputation is bad, lenders may be less willing to lend you money. If they do lend you money, they’ll do so at high interest rates to protect themselves from the risk that you won’t pay on time and in full throughout the life of the loan.
Chapter 7 bankruptcies usually remain on your credit report for 10 years after your discharge date. Chapter 13 bankruptcies remain on your credit report for seven years. Any bankruptcy on your credit file can automatically give you a bad financial reputation, even if your financial record since your filing date has been perfect.
Why Your Financial Reputation Matters
Just like you probably don’t want your family to hang out with people having a bad reputation, banks and other financial institutions don’t want their money in the hands of anyone having a reputation of NOT repaying loans. Bankruptcy broadcasts to others that, at least recently, you were unable to make regular payments on your debt. In particular, bankruptcy can reduce your:
- Access to credit: Some, though not all, lenders will simply refuse to lend money to people with a bankruptcy on their credit report.
- Access to large amounts of credit: Many lenders will agree to lend to people with a bankruptcy on their credit report, but only in small amounts. Since most people use credit to finance major purchases, such as a car or home, having access to only a few thousand dollars’ worth of credit often won’t suffice.
- Access to credit at low interest rates: People with good credit receive lower interest rates, which can result in enormous savings. For instance, a person with good credit may be able to get a mortgage at an interest rate a full 1% lower than someone with bad credit. Though 1% seems insignificant, over time that difference adds up to tens of thousands of dollars.
Despite the negative effects bankruptcy has on your credit rating, you can still get credit afterward. The most difficult time to get credit is immediately after you file, but over time lenders will feel less anxious and will offer you loans at rates approaching those available to borrowers with better credit. Generally, you should wait at least 18 months after your filing date before trying to get new credit. At that point, your wisest step is to apply for a secured credit card.
Secured Credit Cards
Secured credit cards are credit cards that require you to deposit a certain amount of cash into a savings account to which you and the credit card company have access. This cash deposit serves as collateral against your credit limit, the amount of credit that the secured card gives you. If you fail to pay your secured credit card bills, the company that issued your card can withdraw funds from your savings account equal to the amount you’ve failed to pay.
Secured credit cards look just like regular, unsecured credit cards. The amount of money you must deposit varies but usually equals 50–100% of the credit limit (though some lenders require only 10–20% of the credit limit).
After obtaining and responsibly using your secured credit card, you’ll have proof that you can manage credit responsibly, and you’ll begin to get additional credit more easily and at better interest rates.