Rebuilding Your Credit Score After Bankruptcy: A Homeowner's Roadmap

Declaring bankruptcy as a homeowner can be nerve-wracking, but it’s probably not as bad as you think. Most bankruptcies are designed to help you stay in your home, so you won’t have to worry about selling for cash just to get out from under your bills.

Rebuilding your credit post-bankruptcy, on the other hand, is going to be a long road. But being a homeowner helps. Your mortgage will help you build your credit back up (as long as you’re making timely payments), and give you some much-needed stability. Other than that, rebuilding your credit is going to be a matter of showing up, being consistent, and making wise financial decisions, like sticking to a budget, and saving money on expenses.

Let’s take a look at a step-by-step plan to rebuild your credit after declaring bankruptcy.

Know Your Credit Score:

To effectively rehabilitate your credit, you have to keep a close eye on your score to make sure it’s going in the right direction.

Many websites allow you to check out your credit reports for free, so monitor them on at least a weekly basis. These reports won’t be pretty, at least initially. Your bankruptcy will stay on your credit report for years, as will late payments and delinquent debts. However, they’ll age out and eventually disappear from your report.

Be Proactive When You Find Errors:

It’s not uncommon to find errors on your credit report, especially after a bankruptcy. You’ll want to make sure that your debts discharged through your bankruptcy are correctly reported as “discharged” and have a zero balance. Also check that the date of your bankruptcy filing is correct, as the date you file is when the clock starts for expungement from your credit report.

If you do find errors, immediately dispute them in writing through the credit bureau that issued the erroneous report.

Get a Credit-Building Card:

Although debt probably led you to your bankruptcy, debt isn’t your enemy. There are a lot of different ways to think about debt, and taking more on — but doing it responsibly — can actually help you get back to a good credit score. Post-bankruptcy, you’ll have two main options for credit cards.

The first one is the secured credit card. This type of card requires a cash deposit upfront, the amount of which determines the amount of “credit” you get through the card. Making regular purchases and timely payments through this type of card is one of the best ways to rebuild your credit after bankruptcy.

The second type of card to consider is the retail card. These cards, issued directly through various retail establishments, are often much easier to qualify for than other cards. The idea here is the same as with the secured card: Keep your balance low, make on-time payments, and build up your credit.

Get a “Credit Builder” Loan:

Credit builder loans are similar to a secured credit card in that they require you to put money down upfront to “open” the loan. You then make payments on the loan to build your credit. Once the loan’s term is up, you’ll receive a refund of your cash security deposit.

Secured loans can also help you rebuild your credit. These loans are secured by cash or assets, and if you fail to make your payments, the bank will claim those assets. Making timely payments over the term of the loan will significantly improve your credit score.

Remember: Your Home Mortgage Helps

If you haven’t yet paid off your home, your mortgage is going to have a significant influence on your credit score going forward.

As we touched on above, it's possible to keep your home in bankruptcy, and simply maintaining your mortgage is a pretty big net positive for your credit score after bankruptcy. A healthy credit score will indicate that you’re capable of carrying and servicing diverse types of debt, so having a home mortgage on there alongside other types of credit will help you. About 10% of your credit score is based on “credit mix,” so this is a big boost.

The length of your credit history is also a big factor in your credit score, and your mortgage is a long-term loan. Every day you’re in your home, you’re literally building your credit score alongside your home equity.

Of course, you must make your mortgage payments promptly, as payment history is a major factor in your credit score. Make sure you’re getting those mortgage payments in on time, so you don’t derail your credit rebuilding.

Be Careful with Home Renovations:

Home renovations might seem like an easy way to boost your credit score since you've raised your home's value while maintaining a similar monthly mortgage payment. But this doesn't really work for raising your score in practice.

Although home renovations can increase your potential profits on a home sale — especially if you use a discount real estate broker — this won’t translate to a boost in your credit score. Your credit report only takes into account what you owe on your home, not your home’s updated value.

Similarly, refinancing your mortgage won’t necessarily improve your credit score. Even though a refinance can lower your mortgage payments, and creditors generally expect you to put no more than a certain percentage of your income toward your mortgage, the fact that your refinanced mortgage is a new loan means it’ll hurt your credit. (Some experts recommend a refinance anyway, arguing that freeing up cash flow to put toward other debt is worth the small impact on your credit.)

There’s also the question of how you’re going to fund your home renovations. Home equity loans and HELOCs (home equity lines of credit) might seem like they wouldn’t impact your credit score, since you’re essentially drawing on your home equity. But these are new loans, and any new borrowing will likely harm your overall credit.