Rebuilding your credit after bankruptcy is definitely a challenge, but with a solid plan and a bit of patience, you can bounce back.
While bankruptcy can wipe out your current debt, it also seriously harms your credit score. “It results in an R9 credit rating, which stays on your report for seven years,” explains Jody Dwyer, estate administrator at Spergel Trustees in Bankruptcy. The credit rating system runs from R1 (best) to R9 (worst), and an R9 means your credit has taken a serious hit.
Because of this long-lasting damage, bankruptcy should be your last option. “If you’re just a little late on payments, it’s better to catch up than file for bankruptcy and wreck your credit for seven years,” Dwyer adds.
But if bankruptcy is your only choice, don’t worry—you can still rebuild. Here’s how to start the process of re-establishing your credit history.
Identify Where Things Went Wrong
The first step is understanding how you ended up in financial trouble, says Cavan Cottell, estate administrator at Paul J. Pickering Ltd. “Be mindful of what led you here, whether it was a job loss or borrowing beyond your means,” Cottell advises. Knowing what caused your financial problems can help you avoid making the same mistakes in the future, and it can also give you a sense of control moving forward.
Create a New Budget
Once you’ve identified the root of the problem, it’s time to rework your budget. Build in a savings plan to help you weather any future financial emergencies. Set up automatic transfers into a savings account, either through online banking or with the help of a banker.
Savings are crucial, especially when rebuilding credit. For instance, if your car suddenly needs $500 in repairs, you may struggle to borrow money due to your bankruptcy. If you can borrow, the interest rates might be high, which can lead to another debt spiral. By saving, you can avoid taking on more debt and protect your progress.
Start with a Secured Credit Card
Once your budget is in order, it’s time to start rebuilding your credit. A big factor in your credit score is your payment history, so make sure you don’t miss any payments, even on non-credit bills like utilities or cell phone payments.
Once you’ve established good habits, apply for a secured credit card. These cards require a deposit, and the credit limit is usually equal to the deposit amount. As Dwyer explains, “Use the secured card just like a regular one—charge purchases and pay the bill in full each month.” This responsible use will be reported to credit bureaus, helping you gradually rebuild your credit. After a while, you may qualify for a regular credit card or other loans with better interest rates.
Use the Card Wisely
When using your secured credit card, it’s important to treat it like any other financial tool for everyday expenses. Dwyer suggests using it for small purchases like gas and groceries. “Don’t max it out and pay the minimum for months,” she warns. Set a monthly limit that fits your budget and pay the balance in full each time.
“When the bill comes in, pay it off right away,” Dwyer advises. Sticking to this routine helps demonstrate good financial behavior and builds your credit back up.
Add a Note to Your Credit File
Another way to improve your situation is by adding a note to your credit file with Canada’s two major credit bureaus, Equifax and TransUnion. This is a brief statement (50-100 words) explaining any special circumstances that led to your credit problems or clarifying a disputed account. Lenders who pull your credit report will see the note and might give you the benefit of the doubt.
By following these steps—understanding your financial pitfalls, creating a solid budget, using a secured credit card wisely, and explaining your credit issues—you can rebuild your credit history and avoid future financial trouble. It’s a slow process, but one that will set you up for long-term success.
