How Does a Bankruptcy Affect Credit After Two Years?

While you should always do everything possible to avoid bankruptcy, sometimes it is the best thing for your financial future. You can recover from bankruptcy before it leaves your credit report. Take an active approach to rebuilding credit and two years might be all you need -- sometimes a bit less.

Identification

Bankruptcy will affect your credit in some way as long as the bureaus report it. Chapter 13 stays for seven years and Chapter 7 for 10 years. However, all negative items become less important with each passing day. After two years, a bankruptcy probably won't affect your credit enough to prevent obtaining a credit card or major loan, such as a mortgage. Some lenders, such as the Federal Housing Administration, approve applicants with a bankruptcy in the past year.

Considerations

Even if you have a good credit score, a bankruptcy on your report will probably mean paying a bit more on future loans. According to Bankrate, borrowers tend to pay 2 or 3 percent more for mortgages when they have a bankruptcy in the last two to five years. You might have to shop around to find the lowest rate possible or a lender willing to overlook a recent bankruptcy.

Potential Benefit

If you filed Chapter 7 or completed your Chapter 13 repayment plan, bankruptcy might put you in a better position to obtain credit than before you filed, suggests Moran Law. You probably wiped out a significant portion of your debt or at least have a payment plan tailored to your monthly income. Also, the credit bureaus delete the history on bankruptcy accounts and list them as "included in bankruptcy." A bankruptcy filing could improve your credit score because you might wipe out several negative items that cost more points than the bankruptcy, according to Smart Money.

Tip

You must start using credit again after bankruptcy to build a good credit history as long as you feel you can handle a loan or line of credit. The first place to look for credit after bankruptcy is either a secured credit card -- a credit card with a security deposit on the limit -- or a store credit card, which typically have the lowest lending standards. Keep future balances and focus on paying bills on time. Avoid applying for too many accounts too soon. A rush of credit applications will make you look desperate for credit.