Filing for bankruptcy always impacts a credit score. However, the negative repercussions of filing for bankruptcy are not always as severe as many people anticipate. Your present financial situation has an impact on how filing bankruptcy will affect your credit score. People with relatively good credit are likely to see a significant drop in their score after filing for bankruptcy. Although, by the time most people file for bankruptcy their credit score is already pretty low. Those with a low credit score may only notice a small drop in their overall credit score. Similarly, those with numerous credit accounts realize a more significant drop in their score than those with fewer credit accounts.
According to an article reported in 2010 by CNN Money, based on information provided by Fair Isaac, the company that developed FICO Scores, you can expect a 130-240 point drop to your credit score.
Keep in mind that it is possible for people with poor credit ratings to actually improve their credit score just by filing for bankruptcy. When you have outstanding debt or a history of late payments, you receive negative marks on your credit report. Filing for bankruptcy removes these blemishes and instead marks them with a ‘bankruptcy’ status. This status has an impact on your credit score but it could have less of an impact than the separate unpaid payments. For those with extremely poor credit, filing for bankruptcy could actually make an immediate improvement to their credit score.
Receiving an improved credit score after filing bankruptcy is generally the exception, and it is more likely that filing bankruptcy will help to improve your score over a couple of years. Credit scores are determined by comparing your credit activity with others who are in a similar financial situation. So after filing for bankruptcy, credit agencies will compare your activity to others who have filed for bankruptcy. By sticking to a budget and exercising frugality compared to others in your economic class you can dramatically improve your credit rating. Filing for bankruptcy oftentimes makes it easier to climb out of debt than attempting to do so without filing.
In the aftermath of a bankruptcy, individuals often continue to depend on their credit in order to qualify for purchases. Borrowers need to consider how long it might take for their credit to recover. If recovery is measured by the amount of time it takes an individual’s credit score to return to the level it was prior to a bankruptcy, it will take an individual with a higher initial credit score a longer period of time to recover than one with a lower initial credit score. This outcome is due to the fact that the higher initial credit score required a clean credit history. In order to rebuild to a pristine credit history after a bankruptcy, the time requirements will be greater than recovering to a marred credit history.
While it may take an individual with a 680 credit score only a few years to rebuild their credit to that level, it may take an individual with a 780 credit score seven or more years to rebuild to that level. Notwithstanding this, most individuals should not worry about trying to attain a 780 credit score, as such score is generally not necessary to obtain a favorable loan. The reality is that within a couple of years, if an individual can keep his other credit sources clean and make payments on time, the individual will recover enough to qualify for favorable loans at decent interest rates.
Ways to Increase Your Credit Score
One of the most popular questions asked by someone who has filed or is about to file for bankruptcy is how to increase their credit score after the process is complete.
The first thing you’ll want to do after your bankruptcy is apply for 1-3 secured credit cards.
When applying for a credit card, you want to find one that allows you to put a large deposit on it. For example if you can put a $2,000 deposit on the card, it will show the credit bureau that you have a $2,000 credit limit, which will increase you score.
Once you do get approved for a credit card, make sure you only use it for small purchases such as gas, and then pay the balance off each month. The credit increase you get from putting a large deposit on the card will go away if you begin to carry a balance again.
When applying for a secured credit card, look for one that will allow you to put a large deposit of $1,500 or more. If the deposit is a low amount, it won’t do much for your credit score. Capital One allows for a larger deposit of $2,500 – $5,000.
Next, find a card that reports to the three credit bureaus. Capital One is a secured card that reports to these three bureaus.
Most importantly, monitor your credit report every 3-6 months to check for any mistakes, and to make sure that all items that were discharged during the bankruptcy were removed from it.
We can discuss the impact to your credit score during your free consultation. Call Skinner Law Group today at (480) 422-3440 to schedule your free bankruptcy consultation.