How to Build Credit After Bankruptcy

Bankruptcy can be both a relief and a little scary. It helps you get out from under debt, but it's also a negative mark that goes on your credit file. You may be wondering how to build credit after bankruptcy, and just how long it's going to take.

The good news is bankruptcy isn't a credit killer. Some people actually see their credit improve a bit during bankruptcy because it discharges their debts. And no matter where your credit score is after bankruptcy, you can make a lot of progress in as little as six to 12 months.

After you've completed your bankruptcy, here are the basic steps to build credit:

• Review your credit report
• Sign up for free credit monitoring
• Open a credit card or loan

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Next, we're going to cover exactly how to accomplish each of those steps and why they're all important for rebuilding credit.

Review your credit report

Visit AnnualCreditReport.com and request your credit report from the three credit bureaus: Equifax, Experian, and TransUnion. You're legally entitled to one free annual credit report from each credit bureau.

Go over your credit report and look for inaccurate information, like debts that should have been removed after the bankruptcy filing. These can negatively affect your credit, and you don't want them slowing down your rebuild.

If you notice any mistakes, dispute them with the credit bureau that issued the report. All the credit bureaus have an online dispute process, so it's easy to file a dispute. We've also covered how to do this in our guide to the credit bureaus.

READ GUIDE: What Are the 3 Credit Bureaus?

Sign up for free credit monitoring

Choose a free credit monitoring service and sign up for an account to track your credit score. There are quite a few services that provide you with your credit score, updated monthly, free of charge.

I always recommend going with a service that provides your FICO® Score. Your FICO® Score is the one that most lenders use, so it gives you the most accurate idea of what they see when they check your credit. Here are two free options:

• Experian CreditWorks℠ Basic
• Discover® Credit Scorecard

The only way to be sure you're building credit is by keeping an eye on your credit score. You'll be able to see where you're at in relation to the lowest possible credit score and your target score. And truth be told, it's good to get into the habit of checking your credit no matter what your score is. I do it regularly to make sure there aren't any big changes.

LEARN MORE: How to Find Out Your Credit Score

Open a credit card or loan

Apply for a credit card or loan that's designed for rebuilding credit. The most popular options are secured credit cards and credit-builder loans. A secured credit card is one that requires a security deposit to open. A credit-builder loan is a loan where you don't receive the money until after you've paid it off.

LEARN MORE: What Is a Credit-Builder Loan?

This is extremely important -- to build credit, you need to demonstrate you can borrow money and pay it back. That means you need a credit account to make payments on every month, and those payments need to be reported to the credit bureaus.

I'd go with a credit card, because you can use it without paying interest. If you always pay your card's full balance, then there won't be interest charges on your purchases. With a loan, you're going to pay interest. That doesn't make it a bad option, but it can be more expensive.

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What's the fastest way to build credit after bankruptcy?

When it comes to building credit, people usually aren't looking for the slow and steady option. They want to get their credit score back to normal ASAP. Although there's no way to turbocharge this process, you can at least do all the little things that will help you increase your credit score and eventually qualify for the best credit cards.

Use your credit card every month and pay on time: The most important tip is also the simplest. After you've gotten a credit card, make at least one purchase with it per month, and then pay the bill on time. It's also smart to pay the full balance so you don't get charged any interest.

Your payment history is what matters most for your credit score, and it makes up 35% of your FICO® Score. By using your credit card regularly, you'll have a credit card bill to pay every month. Those on-time payments you make will add up and start to improve your credit.

Don't use more than 20% of your credit limit: Another big factor in your credit score is your amounts owed, which account for 30% of your FICO® Score. It's better for your credit score if you're not using up too much of your credit.

The sweet spot is to keep your credit utilization ratio under about 20% to 30%. Credit utilization is the amount of your credit limit that you're using. If your card has a $1,000 limit, then a $200 balance would put you at a 20% credit utilization. Lower is better here, and that's why I suggest going no higher than 20% while you build credit.

Consider getting a loan: You can build credit with a credit card or a loan, but it helps to have one of each. Part of your credit score is your credit mix, a factor that makes up 10% of your FICO® Score. It's better for your credit if you have a credit card and a loan, instead of just one or the other.

Limit new credit applications: Every time you apply for new credit, it has a small impact on your credit score. It's still worth getting at least one credit card or loan, and you may want to get one of each. Other than that, keep applications to a minimum while building your credit. Even though it doesn't have a huge impact, it slows down your progress.

LEARN MORE: Does Applying for a Credit Card Hurt Your Credit Score?

Ask to be an authorized user on another person's credit card: When someone adds you to their credit card account as an authorized user, the card issuer may report that card's activity on your credit file. If that person pays their bill on time and doesn't use too much credit, those are positive activities that could help out your credit.

LEARN MORE: Does Being an Authorized User Build Credit?