Credit and Credit Scores after Bankruptcy
Filing bankruptcy is a series decision that impacts an individual’s credit and credit score for quite some time. Bankruptcy doesn’t have to shut off credit access altogether nor does filing bankruptcy have to be significant detriment for financial success. There are certainly numerous cases of individuals that have filed for bankruptcy and rebounded stronger and gone on to create significant wealth.
A bankruptcy is always one of the biggest negative factors that impact a credit score. How much of an impact it will have on an individual score will depend on the entire credit history and data in the credit report. As time passes, the negative impact of the bankruptcy decreases and the credit score will improve. A credit score can improve significantly faster with a little help and work.
Consumers who file for bankruptcy, file for a variety of reasons ranging from job loss, divorce, medical costs to poor credit decisions. In general, the reason for the bankruptcy doesn’t matter to future lenders and or the credit score calculation. If an individual filed for bankruptcy protection regarding only medical services this would have somewhat of a slighter impact than a bankruptcy that affects all credit. But bankruptcies that only include medial costs are rare and the credit score is going to take a big hit do to the bankruptcy record in most any situation.
The impact to an individual’s scores regarding future credit prospects are the same since most all loan decisions no longer look at qualitative factors such as why an individuals credit is poor rather banks and lenders just numbers such as the credit score and debt ratios, etc…
A credit score takes a big hit from the records of the bankruptcy on the credit report; the impact is different for all cases since the credit history of the individual is different before the bankruptcy. The credit reports of individuals that file bankruptcy often look bad with numerous late payments, collections, and judgments. The credit scores in these cases are already hammered pretty hard before any bankruptcy filing hits the credit report.
After a bankruptcy has been filed, the sooner the individual begins reestablishing credit in good standing, the sooner the credit score will rebound.
For those consumers that have credit available after the bankruptcy, they should keep that credit open. If an individual was able to keep a credit card that was not included in the bankruptcy because there was no balance on it, keeping the line of credit on the credit card open will help rebuild the credit score.
A good start for new credit is to obtain a secured credit card. In may help to even obtain more than one card and continually make monthly payments on time without running up new long term debt. As more time goes by after the bankruptcy the impact of the bankruptcy on the credit score lessens, and it may be possible to apply for a traditional credit card without security.
In general, the derogatory account information reported on a credit report has the most adverse affect on a credit score for the first 24 months after it is recorded. Once an individual is discharged from bankruptcy, they can apply and open new credit whether it’s a bank credit card, retail charge card, gas card and loan.
The nest step after establishing new credit, whether it be on existing accounts or secured credit cards, is to credit any inaccuracies in the credit report that may be holding the credit score down. If an individual finds inaccurate records on accounts that should be removed due to the dates or balances or amount owed, they have the right to dispute these errors. A dispute letter should be sent to each of the credit reporting agencies to correct the errors at Equifax, Experian, and TransUnion no matter how small the error is.
For each of the derogatory records or accounts on a credit report such as collection accounts or judgments or late payments, it is always helpful to check the dates and balances to see if either the amount is wrong on these accounts or to see if the account is past the deadline to remain in the report. Credit scores often have the greatest improvements when expired, derogatory data is removed or inaccurate derogatory data is removed. A key element regarding inaccurate balances is that if the creditor can not validate the amount to the credit reporting agency it has to be removed.
As a final note, always be extra careful not to make any late payments, using new credit responsibly, and don’t apply for too much credit without a purpose. Overtime a credit score will improve as new positive records are posted to the credit report.
The information about bankruptcy is for educational purposes only and is believed to be accurate but is not complete. Freecreditscorehelp.com does not offer legal advice. It is strongly recommended that individuals seek professional legal advice in the event of a bankruptcy filing.
Drawbacks of Credit Cards and Credit Use
One of the primary reasons consumers run into credit issues and subsequently suffer with a low credit score is too much credit card debt. Excessive and unmanageable credit card debt not only causes credit and credit score problems but also is a primary cause of personal bankruptcy filings.
The use of credit usually involves spending money that is not readily available. Obtaining a home mortgage is one form of credit in which borrowers use the money extended with the credit to buy a house. Most individuals would not have the cash available to buy a home without credit being extended with a mortgage. Historically, obtaining a mortgage to buy a house has been a sound use of credit since the borrowed funds were used to purchase and asset, and that asset usually appreciates in value while the debt obtained to buy the assets is reduced in value over time with monthly mortgage payments.
Credit card debt is also used to make purchases with money not readily available, similar to mortgage loan used to buy a house, but credit card debt is usually incurred to purchase disposable items not assets. Credit card purchases are rarely used to buy an asset that is going to appreciate rather they are used for toys, trips, TVs and related consumption goods.
Since consumers can spend more than they currently have with credit, they can easily spend more than they can afford. This is true when credit is used to buy a home but is especially true or more common when credit cards are used. The primary reason is that access to credit cards has been relatively easy and accessible allowing more consumers to lose control over this type of credit.
With credit card use, as the credit card balance increases with purchases and other transactions, the minimum monthly payments also increase, and soon many credit card users find themselves in over their head. This problem is exacerbated if interest rates on the credit card are high or have become high due to late payments and the credit card fees are accumulating. Unmanageable credit card monthly payments tens to lead to late payments and a deteriorating credit history.
Credit card debt generally carries a high interest rate. When someone buys a home, the interest rate on the loan is often 10% lower than the rate on a credit card. Since credit cards are so prevalent, very few consumers pay attention to just how expensive credit card debt is.
Due to these high interest rates, the minimum monthly payment on the total balance due may cover little more than the monthly interest charge. Consequently, the minimum payment may only minimally decrease what is already owed. The low minimum payments, high interest rates and ease of access frequently adds up to trouble for many consumers who end up struggling to pay off the debt they have accumulated to buy everyday items. The end result is a poor credit score, added stress and a decreased standard of living.
Many credit card holders try to manage the high interest rates by accepting promotional credit card offers to transfer credit card balances or open new credit cards with a lower rate. Often these moves simply exacerbate the debt load problem by adding new debt without paying off the accumulated credit card debt.
Some of the reason that new low rate credit cards and balance transfers fail to help is that the low rate offers may be offered on balance transfers with new purchases and cash advances are billed at a higher interest rate and the charges offset the savings you would otherwise enjoy. There are also limitations on the new low rates that are frequently ignored by the card holder as well as the problem that many credit card holders fail to stop using the older credit cards. The result again is higher monthly payment that can lead to late payments, a poor credit history and a low credit score.
To minimize the chances of being a victim of too much credit card debt and a low credit score as result of these burdensome payments, minimize or eliminate credit card use. If the funds are not available simply forgo the purchase. The headache of trying to pay off high rate debt is hardly worth the joy of a new TV, dinner out or other immediate consumption items. Low credit scores and poor credit histories start with too much credit card debt that started with just a little credit card debt.