A bankruptcy can be a devastating last resort for those with financial troubles. It wipes out the mounting debts of the insolvent, but it also destroys his or her credit score for life, right? Actually, bankruptcy might have less of an impact on your credit score than you may think, and its effects can be mitigated and eventually even erased.
What is a Credit Score?
A credit score or FICO score is a number between 300 and 850 that represents a person’s credit report and creditworthiness as evaluated by three different companies. Experian, Equifax, and Transunion are the three major credit bureaus, and they analyze everything from how much credit a person has available and actually uses, to bill payment history, to how long they’ve been using credit. These factors are reported to the bureaus by everyone who has ever engaged in a credit or bill-paying transaction with a person. They are then used by lenders to evaluate whether there’s a risk to consider giving that individual further credit.
What’s in It?
There are a few things that are put into a credit score, and they are weighted according to importance to creditors. First and largest is payment history. Making up 35% of a person’s credit score, how reliably a person pays his or her bills tells a creditor whether a person is likely to pay back money lent to him or her. Next largest at 30% is a person’s credit utilization, which is how much available credit is currently in use; the more available and less in use, the higher the score. 15% is dedicated to the length of credit history, 10% to variety of credit, and the final 10% to any recent credit inquiries or applications.
What happens to your Credit Score after Bankruptcy
Initially bankruptcy can seriously damage your credit score. On average, bankruptcy takes around 200 points off a credit score, but the exact amount varies based on previous score and credit history. This hit can be significant and lower a person from a reliable borrower to a high credit risk. The damage, however, can be diminished almost immediately by building new credit and paying all bills on time. While previous debts are not completely erased from the credit report, they no longer affect the overall credit score; this new freedom can allow an individual to establish a fresh credit history on which he or she can build good credit.
Give It Some Time
Rebuilding credit after bankruptcy is not easy, and the initial hit of filing for bankruptcy can dramatically lower the filer’s credit score. However, chances are good that the score was not so great to begin with; people who make the choice to file for bankruptcy likely had trouble making payments for some time, and had many hits to their credit scores already. At some point, the only way out is up. By filing for bankruptcy, an individual can turn things around and create a fresh start.
Bankruptcy is not the end of the world, not even for your credit score. While the initial hit may hurt quite a bit, with hard work and perseverance, bankruptcy can actually become the new beginning of a strong and positive financial history.
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