People used to fear bankruptcy. It was like the death of your credit score. Today, it’s not as bad as you think. While it’s not a good thing, it certainly doesn’t keep you from getting new credit. Oftentimes you can get new credit soon after the discharge. The fate of your credit’s future is in your hands. There are good and bad sides of filing for a bankruptcy (BK). Here we look at both.
The Good Side of Bankruptcy
Bankruptcy can be a good thing. It does seem odd. How could discharging your debts be good? If you think of the alternative though, it makes sense. If you don’t file for BK, but you can’t afford your debts, what do you do? Chances are you don’t pay your debts. This affects your credit score too. At least with a BK, you show responsibility for your actions. You pay the price of the hit to your credit score and you move on. The hope is that you make smarter financial moves in the future.
In general, your credit score could get hit between 150 and 225 points with a bankruptcy. This is a lot, but you could recover faster than if you defaulted on many accounts. Installment loans and credit cards have an impact on your credit score. If you don’t pay these accounts repeatedly, it continues to affect your score. Getting it over with one time with a BK may work to your benefit.
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The Bad Side of Bankruptcy
Obviously, a downside to BK is the credit score hit. But, as we stated, if you are going to default, you might as well get it over with at once. Prolonging the default and trying to dig your way out can really hurt your score. But, a BK can stay on your credit report for as long as 10 years. That’s a long time to haunt you. That doesn’t mean your credit score stays low for that long. How fast your credit score recovers depends on your actions. This is where you have a direct impact.
Picking up the Pieces
It is your responsibility to pick up the pieces. Yes, you made a mistake. You had to file for BK. Now you move on. The accounts were either discharged or you repay them via a repayment plan. Either way, the accounts are taken care of. Now you must focus on the future. The faster you reestablish yourself as a responsible consumer, the faster your credit score recovers. Here are a few ways to make it happen:
- Watch your credit score. Get your credit report often. Each credit bureau will provide you with a free report annually. Since there are three credit bureaus, you can have a report once every four months for free. Take advantage and review your credit history. See what creditors report. Make sure it’s accurate. Accounts discharged in the bankruptcy should reflect this status. If they don’t, provide the proper paperwork to the credit bureaus, then make sure they change it. Any accounts that remain, make sure they are in good standing.
- Apply for new credit. It may seem odd to apply for new credit, but you must. It’s the only way for your credit score to recover. Secured credit cards are often the best choice. You have a better chance of approval because you only get a credit line as big as your deposit. If you give $500, you get a $500 credit line. If you default, the credit card company can use your deposit to pay the bill. There’s a lower risk of default.
- Slowly build up your credit. Once you have a secured credit card or two, apply for a different type of credit. Try an unsecured credit card or personal loan. You should have a good mix of installment and revolving credit. This helps diversify your credit. It also increases your credit score. This takes time, though. Don’t expect to get an unsecured credit card or installment loan right away.
No matter what type of credit you get, make sure you pay your bills on time. This will help your credit score too. This will help greatly when you applu for a mortgage with a stated income mortgage lender.
Your credit score is made up of many parts. But, payment history has the largest percentage – 35%! From there, your credit score is made up of:
- Credit utilization makes up 30%. This is the amount of debt you have outstanding compared to your available credit. Try to pay your credit card bills off in full each month. If you can’t, don’t have more than 30% of your available credit outstanding at one time.
- Credit history length makes up 15%. This is the length of time your accounts are open. All you can do is wait for this one to help you. This is why applying for credit early after a bankruptcy is crucial to your score.
- New credit makes up 10%. This pertains to the new credit you obtained. Don’t apply for more than one credit card at a time. Once you get approved for one, wait a while before applying for new credit.
- Credit mix makes up the last 10%. This is the mix between installment and revolving credit. Try not to go too heavy on either type. This diversifies your risk and increases your credit score.
Choosing between defaulting on your accounts and filing for bankruptcy is hard. While it’s a hard pill to swallow, BK is often the best choice. It’s only a temporary hit to your credit score. It is also easy to overcome. If you work hard and make sure to make smart choices, you can easily fix your credit score after a BK. Of course, you may have slip ups and getting new credit may be hard. In time, though, the damage disappears. Soon you can reestablish yourself as a responsible consumer. Remember the reason you filed for BK in the first place and don’t get in over your head. This way you can make the most of your financial future.