How going bankrupt affects your credit
Filing for bankruptcy affects your credit history in a way that is difficult to repair. You may find it hard to get a credit card for two main reasons:
- lenders may see you as high risk. Your bankruptcy will stay on your credit report for at least six years and financial companies may be concerned about lending you money in case they don’t get it back. If you manage to get accepted for a credit card, you may face higher interest rates to offset some of the risk they’re taking
- the conditions of bankruptcy mean that every spare penny of your cash should go towards paying back the debt you owe to your existing lenders. These payments will be based on your current income and outgoings and will take into account all your essential spending, like your mortgage or rent, utility bills and grocery shopping. Borrowing more would mean that your budget would need to stretch to include the new repayments – on top of your current bills
Do I need to inform the lender?
If you apply for credit during your bankruptcy, you must disclose your status to the lender if you plan to borrow more than £500. This applies to all types of credit, whether that’s a credit card, loan or overdraft. Because the lender knows you’re bankrupt, they may believe you’re on a tight budget. They’re likely to conclude that you can’t afford to make any more repayments, as a result.
A bankruptcy order also tells lenders that you’ve struggled with borrowing in the past, which could make them more cautious about lending to you. They use your past behaviour to predict your future behaviour. This means if you’re bankrupt and you’re trying to borrow more than £500, it’s unlikely you’ll be accepted.
For this reason, it’s best not to apply for credit while bankrupt – a rejected application could harm your credit history further. Plus, multiple applications made within a short space of time can give lenders the impression that you are desperate for cash.
Tip: You can check your credit report for free and get an insight into how lenders see you. You can go through the three main credit reference agencies in the UK (Experian, Equifax and TransUnion), or through our partners CredAbility.
I plan to borrow under £500
If you’re planning to apply for less than £500, you’re not obliged to tell the lender that you’re bankrupt. But if you’re asked, you should certainly tell them – and it’s a good idea to make them aware either way. Lenders will find out when they check your credit history when you apply to borrow.
What credit options are available if I’ve been declared bankrupt?
If you want to apply for a credit card while bankrupt there are options available to you, like a credit builder card (also known as a bad credit credit card) or a prepaid card. These can help you rebuild your credit score if you use them responsibly.
Some financial companies specialise in lending to people with a history of bad credit, though you’re likely to face higher interest rates if you’re accepted.
Credit rebuilder cards
A credit builder card is a credit card designed for people who have a bad or thin credit history. It works like a normal credit card but often has a lower credit limit.
If you have been declared bankrupt, you can use a credit builder card to help you access better finance options in the future and improve your credit history over time.
To improve your credit score with a credit builder card you need to:
- make your full payments on time, each month
- only borrow what you can afford to pay back
- keep your credit utilisation ratio low
- limit the number of credit card applications you make, because making too many within a short space of time can damage your credit score further.
Tip: Set up a direct debit so you never forget to make a payment.
A prepaid card is a card that you load money onto before using it. Prepaid cards can be used in most places that accept debit or credit cards. It is similar to a pay-as-you-go SIM card for your mobile phone – once you’ve spent the money on it, you will need to top it up before using it again. Unlike a credit card, you can’t use it to borrow money from the bank.
Prepaid cards can be useful to people who have declared bankruptcy for three main reasons:
- they help with budgeting because you can load the card with the money you think you need for a day, week, or month. Knowing that you can’t spend anymore can help you manage your finances more easily and make sure you always have enough set aside to cover your bills
- they could be a better option than carrying around wads of cash. If you’ve been declared bankrupt, you might find it difficult to open a bank account. A prepaid card might be an easier or safer option than keeping all of your money in cash form
- you don’t usually need a credit check to open one (unlike a credit or debit card). So, if you’re unable to open a bank account due to your bankruptcy, then this may be an option to consider.
Bear in mind, you may be charged a fee for setting up a prepaid card, but it is usually minimal. Some card issuers will also charge a monthly fee if you stop using your card. So, it’s best to check the terms and conditions first.
I’m no longer bankrupt - will this change things?
You may find limitations in getting credit cards for discharged bankruptcies. Typically, a bankruptcy order lasts for 12 months, but it will stay on your credit record for at least six years. Although you’re free to borrow once you’re discharged, you may still find it difficult to so.
It can take months or even years to repair your credit history, depending on your starting point. But it is possible to recover. The more time that passes since the bankruptcy was discharged, the easier it should become for you to get credit – as long as you’ve been responsible with money since.
You can improve your credit history once you get your discharge notice by:
- regularly checking your credit report and asking the credit reference agency to update any mistakes that could be showing as red flags to lenders (such as spelling mistakes, or an incorrect address, for example)
- maintaining your repayments on time, every time
- registering on the electoral roll
- asking the credit reference agencies to remove any financial ties you have to other parties that could be bringing your creditworthiness down by association
- consider getting a credit rebuilder card and use it responsibly to show lenders you can manage money well
Before you apply for credit, work out what the monthly repayments are likely to be and whether you can afford them. This could help you avoid the same difficulties that led to your bankruptcy.
Borrowing a small amount (a credit card with a low limit, for example) can help you to gradually improve your credit history. By making at least the minimum repayment each month, you’ll show lenders that you’re a responsible borrower. Then, over time you should open yourself up to more lenders and better deals.
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Intelligent Lending Ltd (credit broker). Capital One is the exclusive lender.