Bankruptcy and Your Credit Score
There’s no way around it: a bankruptcy will unavoidably negatively impact your credit scores. However, there are a number of factors that will affect just how severe the effect is on your score, some of them unexpected. While there is no straightforward formula regarding how many points any one person will lose in a bankruptcy, there are a few factors that can help you make a healthy guess.
A few things to consider:
How High Was Your Score Before?Ironically, someone with a higher FICO score will see a bigger drop as the result of a bankruptcy than someone with a lower score. In a mock scenario released by FICO in 2010, they compared two hypothetical scenarios: one person with a 780 and one person with a 680, both of whom file for bankruptcy. The person with the higher score lost 240 points while the person with the lower score lost only 150, leaving them both with scores in the mid 500s. However, bankruptcy usually occurs after a long stretch of failing to pay bills on time, so, it is likely that late payments already negatively affected your score by the time that you file.
How Many Accounts Are Involved?The more accounts that are included in your bankruptcy, the larger the effect on your credit score. The discharged debts each count as a negative filing. However, these will drop off your credit record seven years after filing, so, your credit rating will start to improve even before the bankruptcy is gone from your credit records.
How Long Ago Was the Bankruptcy?A Chapter 13 bankruptcy filing stays on your credit record for seven years, while a Chapter 7 bankruptcy stays for 10. The longer it has been since you filed and the more responsible you have been in the interceding time, the less your bankruptcy will depress your credit score.
Rebuilding After BankruptcyAfter a bankruptcy, you can rebuild your credit and achieve goals that include a home purchase. Some methods to use during your credit repair journey to improve your score:
- Review your credit reports. Make sure that all debts that were discharged in the bankruptcy are reflected accurately. As many as 79% of all credit reports have at least one error, so, it is worth it to check.
- Pay every bill on time. Late payments can snowball and destroy your credit over time. Try automating payments so you never forget one.
- Look for a secured credit card. Cautiously add revolving loans so that you can show creditors that you can be trusted with credit.
- Use cards sparingly but regularly. Build up a regular habit of responsible use. One good way to do this is to charge a small, regular bill like a gym membership to your card and pay it off in full each month.
- Do not close old credit card accounts. If you have any credit card accounts from before your bankruptcy, keep them open. The age of your credit accounts is a factor in your credit score, and the older your accounts, the better.