If you’re swamped with bills but are worried that filing bankruptcy might have a negative impact on your credit score, it’s important to think about what might be happening to your score right now if you aren’t able to cover your current expenses. If you are struggling to pay your bills, your credit is taking a hit, and let’s be frank, so are your stress levels. Every time you are late paying a credit card bill or making a car payment, your credit score drops by a few points.
A few bad months – losing your job, developing serious health problems, or experiencing some kind of unexpected catastrophe – could cause your credit score to do a complete nosedive. At this point, bankruptcy is one way to help you assuage your financial anxiety and take the first steps toward rebuilding your credit.
FICO scores decoded
There are several different scores creditors use to access your credit health, but the top three credit reporting bureaus include Experian, Equifax, and TransUnion, each of which compiles a measurement of a consumer’s credit risk based on a variety of different pieces of fiscal information, called a FICO score.
FICO scores range from 280-850 and are most commonly used to determine eligibility for loans or credit cards. Scores are based on a number of things, including:
- Debt payment history.
- Current debt-to-credit ratio.
- Credit history, which addresses how long you have had open lines of credit.
- The different types of credit you have, such as home and car loans or credit cards.
- Any new lines of credit.
A low FICO score can be the result of being late with credit card or loan payments, having unpaid debt that has gone to a collection agency, or having lost your home through a foreclosure.
What will bankruptcy do to a FICO score?
While some financial experts say a foreclosure has less of a negative impact on your credit score than filing bankruptcy, bankruptcy allows you to keep your home, which is important given the challenges you might have trying to secure new housing following a foreclosure. While filing bankruptcy will lower a low score even more, if your credit score is already low because of debt, the addition of a bankruptcy may not have the negative impact that makes so many people avoid filing. In most cases, someone who is struggling financially and has a fairly low credit score will see their numbers drop 130 to 150 points almost immediately after filing.
However, you are then in a situation where you have more discretionary income and can potentially make extra car or mortgage payments, which can help you pay those loans off faster, boosting your credit score as you do so. After 10 years, a bankruptcy is no longer included on your credit reports, and the financial benefits from having erased the debt that was originally dragging you down will likely see your FICO score rise significantly.
Are you worried about the impact filing bankruptcy might have on your credit score? Talking to an experienced bankruptcy attorney can help you weigh your options so you have a better idea of what move is right for you. The attorneys at Hedtke Law Group understand your concerns about your credit score and what that means for your financial future, and we can help you make informed decisions that will give you a brighter financial future. Please call us at 626.502.8405 today.