Myths about filing a bankruptcy petition include losing your chances of having good credit again. While a bankruptcy stays on your record for up to 10 years, you may begin rebuilding credit after a discharge of your consumer debts.
Financial institutions use proprietary algorithms to review your application and determine how much of a credit limit to issue. The amount, usually based on your income and expenses, reflects a percentage of the combined usage of all your existing credit accounts. After your bankruptcy, your total credit utilization could reduce significantly.
Reduced credit utilization and on-time payments
After a bankruptcy discharge, your combined consumer debts do not appear as large on your credit report because some of them may no longer exist. When your report does not show high credit utilization, a financial company may have an incentive to provide you with a credit card.
Other factors that may determine your creditworthiness include making on-time secured credit payments, such as for a mortgage or auto loan. Because most individuals keep their homes and cars after a bankruptcy, those monthly payments still appear on their credit reports as made on time.
Credit score rebuilding and budgeting for a secured card
In filing a petition, you may need to plan ahead and budget to determine when you could comfortably apply for a new credit card. As reported by CNBC, if you had a “very good” credit score before a bankruptcy, you may see a reduction of 240 points. A “good” credit score, however, may only drop between 130 and 150 points.
Credit card pre-approval offers generally go by an individual’s score. With a lower score, you may still apply for a card that requires a fee or a security deposit. If a post-bankruptcy budget allows you to afford one you received approval for, making payments each month goes toward rebuilding your score.
A creditor reports on-time payments to the agencies that monitor and track your credit cards, mortgage and loans. Individuals committed to rebuilding their scores typically report improvements within a few years from their bankruptcy.