One of the biggest concerns that most people have about filing bankruptcy is their credit score. As experienced bankruptcy attorneys, we understand our clients concerns about their credit score after bankruptcy. Your credit score affects everything from obtaining new credit, to the amount you pay for your automobile insurance. Credit ratings are vital to our financial stability, and rebuilding credit takes time and patience.
Contrary to popular belief however, most of the damage done to your credit score will take place before you make a decision to file bankruptcy. Credit score damage occurs through missed, late or incomplete payments, the length of time you fall short on your payments, the amount you owe and more. Bankruptcy, in fact, is one of the first steps toward rebuilding your credit score. After your bankruptcy is complete, then the rest of the rebuilding work can begin.
How is My Credit Score Calculated?
Understanding how your FICO credit score is calculated is essential to rebuilding your credit score after bankruptcy. Your credit score is comprised of five elements:
- Payment history – Your payment history accounts for 35% of your credit score. Making late payments will lower your credit score very quickly. Unfortunately, by the time most people decide they need to file bankruptcy, the damage to their credit score is significant due to their inability to pay their bills. With each month that passes where you are unable to pay your bills, your credit score drops. Bankruptcy ends that cycle.
- Balances owed – This accounts for 30% of your overall credit score. As you are unable to make your payments, late fees and interest cause the balances on your accounts to increase. The higher your balances on accounts, the more it will have a negative impact on your credit score. Bankruptcy also helps this by discharging the debts rather than allowing the balances to increase.
- Length of credit history – This accounts for 15% of your credit history. A longer credit history has a positive effect on your credit score.
- Types of credit – This is 10% of your credit score. Having a variety of debt (i.e. credit cards, installment loans, retail accounts, mortgages, etc.) is better for your overall credit score, when compared to a person with only credit cards and personal loans.
- New credit applications – This also accounts for 10% of your credit score. Often when people are struggling with debt, they will apply for new accounts in an attempt to borrow money to pay other debts. Each time you apply for new credit, it makes a dent in your credit score.
Filing a bankruptcy can actually help you repair the damage to your credit score faster than ignoring the problem. Without bankruptcy it would take years for the damaging information to “fall off” your credit report; however, filing a bankruptcy stops the negative reporting of late payments, over-the-limit accounts and charge-offs once the debt is discharged through bankruptcy. This gives you the fresh start that many people need in order to begin to rebuild their finances and repair their credit.
Tips for Rebuilding Your Credit Score after Bankruptcy
There are several ways that you can begin to rebuild your credit score immediately after your bankruptcy case has concluded. In fact, the first step in the right direction occurs during the bankruptcy filing process, prior to receiving your bankruptcy discharge: mandatory credit counseling and financial management courses. As a part of the bankruptcy process you will be required to complete a credit counseling course and a financial management course. These courses are designed to provide skills and tools to manage money, and prevent issues in the future. Through your financial management course you will learn how to prepare a budget, handle debt and plan for your financial future.
Other tips for rebuilding your credit score after bankruptcy include:
- Make all payments on time – This is the number one way to repair your credit score. This accounts for the largest portion of your credit score; therefore, you must make all payments on or before the due date. One way to do this is to ensure you never forget or miss a payment is to set up automatic withdrawals or payments.
- Secured credit cards – Secured credit cards are a good way to work to rebuild credit scores after bankruptcy. You make a deposit with the credit card company that secures your purchases should you default on the payment. Make sure that the credit card company reports payment histories to the three main credit reporting agencies. As you use the secured credit card and make timely payments, your credit score will improve.
- Do not close old credit accounts – Your length of credit helps to improve your credit score. If the older accounts remain open and you can use them, charge small amounts and pay them off on time to improve your credit score.
- Keep balances low – Remember that the amount of credit you charge also gets figured into your credit score. It is a good idea to keep the total amount owed at 30% or below your maximum credit balances to keep improving your credit score.
- Open an installment account – As soon as you can, open a small installment account. Having a good mixture of credit will improve your credit score.
- Dispute errors and mistakes – You are entitled to receive a free copy of your credit report from all three credit reporting agencies once every 12 months (www.annualcreditreport.com). Order copies of your credit reports every 12 months and review them to ensure that the information reported is complete and accurate. If you find any errors or mistakes (they do happen quite frequently), file a dispute with the credit reporting agency and notify the lender immediately.
Take a Positive Step to Resolve Your Debt and Related Credit Issues
We offer free bankruptcy consultations so that you can get the information you need to make an informed decision about bankruptcy. We understand how difficult it is to overcome a financial crisis, but the best way to start is to know and understand your options. There are several debt solutions available; we can help you find one that is right for your situation – finding affordable solutions to debt problems is what we do.
We want to help you get the fresh start that you need in order to begin repairing the damage to your credit score, so request a free consultation today to get started.