Many people often fear that filing bankruptcy will ruin their credit forever. The truth is, bankruptcy is just on part of your financial strength. Here are the 7 exposed things that happen to your credit score when you file bankruptcy. Once they happen, it is time to credit score back on track. I often say that restoring your credit is similar to losing weight and working out. The harder you want to work at it, the more results you will see.
Your credit score is made up of many factors. These factors include:
- Timely Payments – This item is straightforward. Your credit score is calculated based on whether you make timely payments or not. A one month late payment reported to your credit bureaus can stay on your credit report for years. If you make a late (30 days late or more) to Macy’s, it could negatively affect your credit for up to seven (7) years! Takeaway tip: Make sure you only use as much credit as you can make the payments for each month.
- Latest activity – Part of your credit score also depends on your recent credit inquiries. Every time you go to open a new credit card, buy a car, or even some employment screenings, there is a mark on your credit report. It can affect your credit score in both good and bad ways. The credit inquires can affect your credit score in a good way because applying for credit (and being approved for it) will help with diversity of accounts and available credit. The credit inquires can also affect your credit score in a bad way if you are declined for credit or if you do not have credit inquiries in the last 2-3 years. Failure to seek new credit can also affect your credit score. Takeaway tip: Apply for new credit every year or so and make sure you will get the new credit.
- Diversity of Accounts – Your credit score is also based on the different types of accounts you have. There are many types of accounts you can have and the more types you have, you can increase your credit score. Types of accounts include mortgages, car loans, corporation credit cards (A Chase card, for example), store credit cards, and student loans. The more types of these accounts you have can increase your score because you are showing that you can manage different types of credit responsibly. Want to meet someone with a great credit score? Chances are they have a mortgage, a car loan, and 2 credit cards. They also pay their bills on time and they often pay more than the minimum payment on their card. Takeaway tip: Make sure to have different types of accounts so that you can increase your credit score.
- Credit Usage Ratio – Your credit score calculation includes whether you have available credit and how much credit you use compared to your total credit. In order to increase your credit score, try to reduce your credit usage to 10% of your total credit. This means if your credit card has a $10,000 limit, try to keep your usage to no more than $1,000.00. If you are using more than $1,000 on the credit card, put a plan in place to get your balance down to $1,000 by paying more than the minimums each month. Takeaway tip: Keep credit usage at or below 10%.
- Credit history – How long you have had credit cards increases your credit score. For teenagers who responsibly used their parents’ accounts as an authorized user at 16 years old, their credit score has the possibility of being quite strong. Presumably, if those same teenagers continued their good financial habits through their college years. If you feared getting a credit card and didn’t do so until your thirties, chances are this will negatively impact your credit score. Takeaway tip: Get credit early and use it responsibly.
- Debt to Income Ratio – This is an important part of calculating your credit score. Your score is also based on how much debt you have, compared to your income. If you have more debt ($100,000) but your income is only $35,000, you will have a lower score. If you have debt ($20,000) but your income is $60,000, you will have a higher score. This is the unique resolution bankruptcy provides. If you file bankruptcy, in most cases you will reduce your debt to $0.00. If you are working and have an income, the bankruptcy will actually work to increase your post-filing credit score. Takeaway tip: Keep your debt lower than your income or consider bankruptcy as an option to reduce your debt.
When you file, these are the 7 Exposed Things That Happen To Your Credit Score When You File Bankruptcy:
- All of your credit cards are closed. This means that as of the date that you file for bankruptcy, you no longer have any credit accounts open.
- Timely Payments – Your timely payments reset to zero. This means that after your bankruptcy, you will have no record of current timely payments.
- Latest activity – Your credit inquiries category is not affected all that much. You should not attempt to obtain credit while your Chapter 7 bankruptcy case is pending. You should also not attempt to obtain credit while your Chapter 13 Plan is in the process of confirmation. For this reason, you will not have any credit inquires on your credit report and this category should remain the same.
- Diversity of Accounts – Your credit score is also based on the different types of accounts you have. Once you file bankruptcy, your credit cards go to zero and your diversity of accounts will be negatively affected while you have no credit cards open in your name.
- Credit Usage Ratio – Your credit usage is whether you have available credit and how much credit you use compared to your total credit. When you file bankruptcy, your credit usage tanks because you have no available credit and you are not using credit usage.
- Credit history – Your credit history will show a gap between the time you filed bankruptcy and the time you reopen credit. Until you reopen credit, this category may be affected.
- Debt to Income Ratio – Your credit card debt and medical bill debt will reduce to zero. This is the one aspect of your credit score that increases the moment your bankruptcy case is discharged. This is because before you file before bankruptcy you have a lot of debt. After you file bankruptcy, your debt decreases and/or disappears, while often times your income remains the same before and after bankruptcy.
Now that your bankruptcy is completed, what can you do to start building that credit back up?
- A secured credit card is an excellent option to begin improving your credit score. You can usually get a secured credit card from the bank where your checking account is. You can usually get a secured credit card in limits from $500.00 to $2,500.00. What you do is you pay upfront for the amount of credit you would like. If you would like a secured credit card with a $1,000 limit, you would pay the bank $1,000.00 for your secured credit card. You use the secured credit card like you would use any other credit card. You use it to make purchases and then you want to pay off the balance in full each month. The bank protects itself from your less-than-perfect credit by holding your pre-paid $1,000. If you do not pay your credit card bill, the bank already has their money. If you make your payments, they report the positive marks on your credit score. It is a win-win situation.
- Make smart and wise credit choices going forward.
- Pay your credit card balance in full each month.
- Pay your bill early or on time each month.
- Keep your credit card balances under 10%.
- Use an app on your phone, such as Credit Sesame, to help keep you on track, review your finances, and monitor your ongoing credit score. Download Credit Sesame HERE.
Meeting with an experienced bankruptcy attorney can ease your fears and ensure your credit score is going to get back on the right track after your bankruptcy filing. There is no substitution for the advice an experienced bankruptcy attorney can provide. You may find a great value in the fees you pay for an attorney to handle your paperwork correctly and counsel you about your bankruptcy. Contact Feher Law to set up your complimentary bankruptcy consultation through our website, https://feherlaw.com/contact-feher-law-st-petersburg-florida, at 727-359-0367, or via email at Kfeher@FeherLaw.com.