Filing for bankruptcy can give you a fresh start by clearing away most of your existing debt. However, the negative effects of bankruptcy on your credit can be significant. A lower credit rating makes it harder to qualify for things like a car loan at a good interest rate. It can also affect your credit limits on cards offered to you. But just how much does your credit rating drop and how long does it take to improve your score after final discharge?
How long does bankruptcy stay on your credit report?
The two types of personal bankruptcy affect your credit differently. In both cases, bankruptcy creates a negative item on your credit report. However, the time this negative item remains differs between the two Chapters:
- Chapter 13 bankruptcy credit report penalty: Lasts seven years from the date of final discharge
- Chapter 7 bankruptcy credit report penalty: Lasts ten years from the date of final discharge
The effect of these penalties on your credit score can vary. If you have a high score, then bankruptcy tends to have a greater impact. The point-decrease is often less with a lower score because you have less room to fall.
What bankruptcy does to your credit score
In 2010, FICO released a report that showed examples for the average credit score after bankruptcy. The decrease when you started with a high score is more significant.
|Starting Credit Score||Amount Your Score Declines||Average Credit Score after Bankruptcy|
|780 credit score (excellent)||240||540|
|680 credit score (fair)||150||530|
In both cases, you end up with a bad credit score. But the decrease from fair to bad is less than from excellent to bad. Essentially, you have more to lose when you have good or excellent credit. If you already have bad credit (less than 550 credit score) then the point-damage may not be that bad. Remember, FICO scores only go down to 300, but it’s rare to see anything below 500.
Why you need to work on your credit after bankruptcy
If you have a 550 credit score, borrowing is going to be challenging. A credit score of 550 or lower is usually too low to qualify for a mortgage. However, you’re not that far off from the score you need to qualify for this good debt. With FHA financing options, you only need a 560-600 to qualify. Of course, if you want to use traditional financing options, you generally need at least a 600 credit score.
However, besides loan approvals there are other concerns that come with a low score:
- Lower credit limits on credit cards, even cards offered through pre-approved screenings
- A higher interest rate on almost any type of financing you seek; this increases total cost and may increase monthly payments, too.
- Less ability to qualify for attractive advertised terms on financing like car loans – i.e. you can’t qualify for $0 down advertised dealership loans.
So, is bankruptcy bad for your credit? Yes. But it might not be as bad as you think. And there are financing options specifically designed to help people in your situation. For instance, there are solutions for buying a car after bankruptcy.
How to raise your credit score after bankruptcy
No matter where you started and ended up, the good news is that you can bounce back quickly. Bankruptcy penalties last 7-10 years. However, the “weight” of these penalties decreases over time. So, a filing made last year affects your credit harder than one made five years ago.
The American credit system is fairly forgiving, so even before penalties expire you can work to offset them. If bankruptcy dropped you to a 550 credit score or lower, you can recover in as little as 12-18 months. You may not achieve excellent credit until the bankruptcy drops off your credit report, but you can at least get back in the fair range.
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Step-by-step instructions for raising credit score after bankruptcy
Once you receive final discharge, wait 30 days and then:
- Go to annualcreditreport.com to download three credit reports from each bureau.
- Make sure all accounts included in bankruptcy show a zero balance; the late payments made before you filed will still show up on your credit report after bankruptcy.
- If any accounts don’t appear as paid, go through credit repair to make disputes so you can have those items removed.
- If you have debts that were not discharged, like student loans, make all the payments on time to begin building positive payment history.
- Consider getting a secured credit card using a small cash deposit or a small personal loan.
- Make all the payments on time; if you opened a credit card, never carry a balance of more than 30% of your total available credit limit.
- Gradually take on new credit after you make sure you can afford the payments; don’t open more than one account at a time within a six-month period.
- Work your way up to bigger loans, like a car loan, so you hold a diverse mix of debts.
This process will allow you to build credit the right way. You usually see a notable improvement in your credit score within 12 months.