Bankruptcy and Your Credit Score: The Real Story

One of the questions I am asked the most is the effect of a bankruptcy on their credit score. When you first file for bankruptcy this can initially drop your credit score; however, over time this will become less and less of a hit. This is mostly in the case of people who still have a good credit score, but I have found that by the time someone meets with me they are usually already at the point where they are getting judgments/garnishments against them because they are behind on their payments, or they are close to it.

Your Credit Score can be affected by several things:

Missed payments (makes up 35% of your score)

High debt in comparison to your credit limits (35%)

Number of years of credit history (15%)

Opening a lot of New accounts at once (10%)

Credit of the same type (10%)

Depending on whether you decide to do a Chapter 13 bankruptcy or a Chapter 7 bankruptcy, it will be on your credit report for 7 to 10 years. However, once things on your credit report that were connected to your bankruptcy get older they begin to fall off your credit report and therefore effect your credit score less and less.

When someone applies for a new credit card, or a mortgage, or a car loan the first thing that the creditor will do is check your Credit Score. The thing they are most concerned about is what has happened in the past 24 months. Depending on when your first got your accounts, if none of them are more than ten years old, a bankruptcy may put you back into the same position you were when you were 18 with no credit history. This is why it is crucial for you to start implementing good habits right away to rebuild your credit after a bankruptcy. Despite your bankruptcy, there are a few ways to rebuild your credit after your discharge.

Secured Credit Cards: This requires you to give the credit card company a lump sum of money that they keep as collateral. You are then issued a card with a limit for that amount. Be careful to look at the hidden fees and make sure you’re not spending more than it is worth.

Car loan: specifically, when you have a large down payment, getting a car loan is usually easier than other types of loans. If you reaffirm a car loan from before your bankruptcy this can help build your credit as well.

Store Credit Cards: When applying for a store card they often times have less stringent requirements in order to qualify. However, this also means they tend to have a higher interest rate so make sure that you are not putting yourself back in the same boat you just got out of. The best way to use these, if you know you have $20 in your pocket and you want to buy a shirt from JCPenny’s for $18. Use your card and once the transaction is complete ask to pay off the balance on your card.

Some other tips to keep in mind while trying to rebuild your credit is to (1) keep your older cards active and in good standing, this will help you with your “length of credit history” factor; (2) don’t apply for multiple cards in the beginning because you’re trying to rebuild your score, this will help you with the “opening too many accounts” factor; and (3) do your homework on any credit card offers your receive and use those cards wisely.

 

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