One of the biggest fears people have about filing bankruptcy is the impact on their credit scores. Will your credit score be trashed forever? How low will it go?
Credit has become such a staple in our lives that living without good credit can be a huge inconvenience. People are so afraid of losing their good credit – their mediocre credit even – that they struggle with debt for months or years and still end up filing bankruptcy. Unfortunately, there’s not much good news about your credit score when it comes to bankruptcy, but that doesn’t mean you should hold up on filing bankruptcy just to hold on to your credit score.
So, what happens to my credit score if I file bankruptcy?
Like all negative information reported to the credit bureaus, filing any type of bankruptcy will have a negative impact on your credit score. Since a bankruptcy filing is a public record, they will find out, even if they’re not directly notified by the bankruptcy court.
Bankruptcy is one of the most damaging things that can appear on your credit report. Exactly how much a bankruptcy will cause your credit score to drop, however, is impossible to know, since the three main credit bureaus — Equifax, Experian, and TransUnion — do not publicly release the precise formulas they use to calculate credit scores. Furthermore, other variables, such as your pre-bankruptcy score, your credit history, and what accounts may have stayed in good standing while you were in bankruptcy, will also be factors.
Whatever the drop turns out to be, the filing for bankruptcy virtually ensures a very low credit score — at least for the while — and it will be listed on your credit report for 7-10 years.
There are several steps you can take to help improve your credit rating post-bankruptcy. Building and maintaining a good credit score requires diligent effort and along-term commitment to financially sound living.
Repairing Your Credit after Bankruptcy
If you want to buy a home or car, you need either a lot of cash or a large loan. It’s been that way forever and things won’t change just because you have filed for bankruptcy.
The problem is that after bankruptcy the sight of your credit report will repel lenders. If you want to get a mortgage after bankruptcy, you need to restore your credit score to a respectable value. A FICO score of 680 is considered good and would net you fair rates at most financial institutions.
Your recent actions have a bigger impact on your credit score than negative events in the past, so you want to make sure that you are feeding your credit report positive data in the years following bankruptcy to build up from a low score.
The best way to improve your credit score is to make on-time payments. Credit bureaus track the payments made to your open accounts, like loans or credit cards. However, you may not have any of these accounts open after bankruptcy.
This traps you in a ridiculous dilemma: you need an open account to improve your credit score, but you need an improved credit score to open an account. It will take some persistence, but there are ways to get around this pesky catch-22.
Here is a list of things you can do to improve your credit score after bankruptcy:
- Monitor credit report for accuracy
- Make on-time payments on debts not included in your bankruptcy
- Build credit with a secured or retail credit card
- Have someone cosign for a new credit card or loan
- Become an authorized account user
- Credit builder or secured loans
I Filed for Bankruptcy – Now What?
Life after bankruptcy doesn’t need to be a nightmare. Speaking to a credit counselor can help clear up some questions you may have related to your current condition and outlook. Counselors can give you tips and advice on how to overcome the struggles that are bound to boggle consumers new to bankruptcy.
Bankruptcy is a shot at a fresh start. Keep in mind, you’re in a much better position now than you were immediately before filing. You’re moving in the right direction.
You do, however, have to find a way to show FICO and the credit bureaus that you’re making smart moves with your money. You can do this best by applying for low-risk forms of credit and paying your bills on time every month.