How Bankruptcy Affects your Credit Score

If you wish to consider filing for Chapter 7 or Chapter 13 bankruptcy, you need to know how it affects your credit score.  Nearly 50% of consumers do not understand the purpose of their credit score according to a survey by Consumer Federation of America and Fair Isaac Corporation.  A consumer’s credit scores is used by financial institutions to decide whether to extend or deny credit to that consumer.  In addition, it can also affect the interest rates and amount of loan you receive.  So a poor credit score can make borrowing more costly.
The most commonly used formula to determine a person’s credit score is the FICO score, developed by Fair Isaac using 22 pieces of data from 3 major reporting agencies namely TransUnion, Equifax and Experian.  Scores range from a low of 300 to a high of 850, with the average score being 723 according to Bankrate.com.  In addition there are five other data points that make up the bulk of the FICO score:1. Payment history (35% of the rating)2. Length of credit history (15%)3. New credit (10%)4. Types of credit used (10%)5. Debt (30%)
If you have filed for bankruptcy, your credit score can fall.  A foreclosure can result in an 85-160 point drop and bankruptcy taking a score down 130-240 points.
Accounts discharged in a bankruptcy will remain on your credit report for a maximum of seven years.  The bankruptcy itself, however, can remain on the credit report longer depending on which chapter you file.  If filing under Chapter 13, the bankruptcy can remain noted on your credit report for 7 years.  If filing a Chapter 7, 11 or 12, the designation can remain for up to 10 years.
But you can improve your long term credit score by taking several steps:1. Pay bills on time.  This is the most weighted factor in FICO scores.  If you are always late, your score can drop as much as 100 points.2. Keep credit balances low.  FICO scores calculate your score based partly on your available credit to your outstanding balances.3. Close your credit accounts.  Creditors like to see consumers with established and lengthy credit histories.4. Use discretion when applying for credit.  When you apply for credit, lenders request a copy of your report.  This request is noted on your credit report and can reduce your score.
Perhaps the most important thing to do when rebuilding your score is to be patient.  It can take some time to rebuild credit, but by living within a budget and paying your bills on time your score will gradually improve.
Bankruptcy is a complex process, but can give people the fresh start they need. If you are considering bankruptcy or concerned about how it will affect your credit and your future, call us at (813) 200-4133.

Related Blogs