Many people thinking about filing bankruptcy worry about its impact on their credit score and their ability to obtain credit or financing in the future.
These concerns are understandable because filing bankruptcy will impact your credit score and that can be scary.
The good news is that bankruptcy’s impact is temporary and it is often less severe than many people expect. A few years ago, FICO reported that the average FICO score after bankruptcy fell between 500 and 550.
This necessarily means that bankruptcy does not affect everyone equally. Someone with a higher FICO score and better credit history should expect to see a greater raw decrease than someone with a lower score before bankruptcy.
Sometimes this deters people from filing bankruptcy. But if there already is no hope for your financial situation to improve on its own, not filing bankruptcy is likely to hurt your credit score just as much or even more over time. Not filing also may be far more expensive and could expose you to lawsuits and other collection action.
How to improve your credit score after bankruptcy
The first thing you will want to do after bankruptcy discharge is review your credit report to verify that all debts are reported accurately. Discharged debts should report a zero balance. If there are discrepancies, you will want to contact the appropriate bureau to report and correct the errors.
Your credit report will show the bankruptcy for seven years if you file chapter 13 and ten years if you file chapter 7. The weight your score gives to the bankruptcy decreases over time and you will be able to start the process of rebuilding your credit immediately after discharge.
If the credit report looks accurate, you can start to apply for new credit. There are lending programs available to help people who recently filed bankruptcy open new lines of credit or even purchase a new car or home.
Research these opportunities carefully as there are also predatory lenders out there who target bankruptcy filers with outrageous interest rates and other unfavorable lending terms.
We usually recommend opening a credit card with a modest credit limit and using it like a debit card. By that we mean use it for everyday purchases and pay the statement in full each month to avoid any interest charges.
One of the biggest mistakes people make is converting to “cash only” after filing bankruptcy. The fastest way to build credit is to use credit and pay on time.
You can carry a revolving balance, though most of the credit bureaus penalize balances greater than 30% of the total available credit limit, and we encourage our clients to avoid unnecessary interest charges.
As you establish a new repayment history, you will be presented with additional opportunities to obtain more credit. Just be careful not to overextend yourself.
We usually recommend opening no more than one new line of credit every six months. Rapid applications for new credit can hurt your credit score.
Following these basic steps can substantially improve your credit score within the first year after bankruptcy.
If you have more questions about bankruptcy and your credit score, contact us for a free consultation with an experienced bankruptcy attorney.