Your debts have stacked up, and now you need help to get out from under a mountain of bills and payments. It seems like you’ll never be able to pay it all, and bankruptcy is looking like the best solution. It may get rid of most of your debts, but what about your dreams of buying a house or a new car? Will your credit score ever be able to recover from the damage of bankruptcy?
We’ve answered these questions and more so that you can be prepared for your financial future after bankruptcy. Find out what you need to know about your credit score before you file for bankruptcy.
How does bankruptcy impact my score?
The bad news first: bankruptcy will have a serious negative impact on your credit score. There is no way around seeing your credit score fall after your debts are discharged. Unfortunately, having a higher credit score will not protect you from having a drastically lowered score post-bankruptcy either. Normally, your score will go down anywhere from 100-200 points, often ending up in the low to mid 500s. For Chapter 13 and Chapter 7 bankruptcy, it will stay on your record for 10 years.
Having said that, declaring for bankruptcy will usually improve your credit score in the long term. With more of your debts discharged, it will be easier for you to make repayments on debts that cannot be discharged or any new debts you take on. By not filing for bankruptcy, you can end up caught in an endless cycle of not being able to repay your debts and lowering your score. Though the initial hit to your credit will be tough, you can overcome it by making smart financial decisions.
How do I rebuild credit after bankruptcy?
Now that your credit score has fallen, what are your next steps to start repairing it? Before you start taking drastic measures, it’s important to understand how your credit score is calculated. Most credit bureaus use these five metrics to determine your score:
- Payment history
- Credit utilization
- Length of credit history
- Recent activity
- Total outstanding debts
Payment history and credit utilization are the two most important metrics, making up 35% and 30% of your credit score, respectively. What does this mean for you? First, you should make it a point to always pay your debts on time. Even one missed payment can have an extremely negative impact for those who have had their debts discharged through bankruptcy. Second, you should never use more than 30% of your limit on a credit card. Frequently maxing out your credit cards can raise a red flag to credit reporting bureaus. By paying heed to these factors, you can help to raise your credit more easily.
Aside from paying on time and not over-spending, there are various other tactics you can use to raise your score:
- Start establishing credit. As soon as your debts are discharged, you should start building up good credit to offset the bankruptcy. This can be done easily through a secured credit card which requires an upfront payment before you can begin using it. Be wary of many credit card offers, as they may come with huge interest rates and fees in an attempt to prey off of your bankruptcy status. As you start establishing credit, be sure to spread out your open accounts over time, since opening too many accounts at once can be a negative hit to your score.
- Become an authorized user. If you have a very trusted family member or friend, ask them if you can be an authorized user on a credit account of theirs. If they keep up with payments, it can show that you are paying the bill on time and raise your credit score. Be very careful about doing this — if they become delinquent on payments, it will reflect negatively on your score.
- Diversify your debts. Having different types of debt creates a more rounded portfolio of your credit, and having more active accounts open helps boost your credit score. Consider getting a small personal loan that you can repay quickly or a car loan if one is needed. Be sensible about the new debts you take on and make sure you can pay more than the minimum payment before receiving a loan.
- Monitor your credit. Check in monthly with credit reporting agencies to see if there are any erroneous claims on your credit report. The Federal Trade Commission has stated that one in five Americans has an error on their credit reports that could cause a misrepresentation of your credit score, making it all the more important to know what is on your report. If you see anything that doesn’t look correct, you should begin disputing the error with the credit reporting agency.
Are you ready to file for bankruptcy and get your life back on track?
Contact Reynolds & Gold Law. We can help you to cancel your debts and start saving for a new future.