The Harsh Reality of Facing Bankruptcy
Bankruptcy is undeniably one of the worst things — if not the worst thing — you can do to your credit, typically causing a credit score to drop at least 200 points. That said, there are things that you can do to minimize the impact and speed up the recovery process of your credit. This is done primarily through better awareness of how credit scores treat bankruptcy.
If you are hoping to purchase a home, buy a car, or take out any sort of loan, having a low credit score can be incredibly discouraging and can make doing these things near impossible – at least without being hit with incredibly high-interest rates.
In order to understand how bankruptcy can be handled in the best way, and how it can impact your dreams and goals, let’s look at some common misconceptions about how bankruptcy works and how it impacts credit scores.
Myth: A bankruptcy will impact all consumers in the same way. So it doesn’t matter how many many debts are included in the bankruptcy or the total amount of debt that is discharged.
Fact: Although many people believe this information, this information is not correct. There are certain credit scoring factors that specifically evaluate the magnitude of each individual bankruptcy. These factors include the amount of debt that is discharged and the proportion of negative to positive accounts on the credit report. This means that a relatively low debt total spread over only a few accounts that are included in bankruptcy can lead to a higher post-bankruptcy score than one for which the scope of the bankruptcy is more extensive.
Myth: Any and all credit history that is associated with accounts that are included in the bankruptcy will be removed from your credit report immediately.
Fact: The harsh reality is that all of the bankruptcy-related history and information will continue to appear on your credit report. It is used and is considered by the scoring formulas for the first 7 to 10 post-bankruptcy years. Although this can be discouraging, it is important to remember that the negative impact will diminish over time – as long as you are taking the necessary steps to improve your score at the same time.
Myth: Regardless of what you do to improve it, you will have a low credit score for as long as the bankruptcy information remains on your credit report.
Fact: This myth is not COMPLETELY incorrect, it is important that you do not get your hopes up and expect a high score following a bankruptcy. However, if you manage your credit optimally in its aftermath you can be looking at a fantastic 700 score or higher after only a few short years. In order to achieve this credit score, however, there are a few things that you have to make sure that you are doing:
- Adding what credit professionals call “positive” credit to help offset the negative implications of your bankruptcy. Examples of these are secured credit cards, becoming an authorized user on a credit card and installment loans.
- On-time payments on all remaining and recently acquired debt
- Low balances on credit cards that make up less than 25 percent of the credit limits