Bankruptcy and Credit Scores
By: Crystal H. Thornton-Illar, Esq.
An overriding concern of individuals considering bankruptcy is what a bankruptcy will do to their credit score, and rightly so. Credit scores are used to determine whether you qualify for additional credit or, insurance, an apartment, and even a job. Your credit score may also affect how much you will pay for rent, insurance, and interest on a new loan.
If you are considering bankruptcy, there is a good chance your credit score may have already been negatively impacted from a high debt-to available-credit ratio, missed payments and/or late payments. Just how much a bankruptcy will impact your credit score depends on your credit score prior to bankruptcy. According to FICO, the best-known company that calculates credit scores, a person with a high credit score before bankruptcy can expect a significant drop in their credit score after bankruptcy, but a person with a low credit score prior to bankruptcy may experience only a slight drop in their credit score.
While it is true that bankruptcy can remain on your credit report for up to 10 years, you do not have to suffer with bad credit forever or even for 10 years because of a bankruptcy. If you follow these steps, you can begin to rebuild your credit immediately after receiving your bankruptcy discharge.
Obtain a Credit Card
While this may seem counterintuitive, the most important step you can take to improve your credit score after bankruptcy is to obtain a new credit card. The credit card will likely have a low credit limit and a high interest rate. Use the card each month for items you will buy anyway, and pay the outstanding balance in full and by the due date each month.
Try to obtain a traditional credit card first, but if you are unable to obtain a traditional credit card, consider applying for a secured credit card. A secured credit card requires a deposit with the credit card company as security for the unpaid balance. The credit line on a secured credit card typically ranges from 50% to 100% of the deposit amount. As with traditional credit cards, use the secured card each month, and pay the balance in full and on time each month to begin rebuilding your credit. After 3-6 months of using the secured credit card, you should apply for a traditional credit card (and will likely qualify for a traditional credit card by this point).
Make All Payments by the Due Date
As noted above, but this bears repeating, you should make your credit card payments prior to the due date every month, and you should pay at least the full minimum payment (preferably paying the entire balance in full every month). If you reaffirmed a mortgage or car loan as part of the bankruptcy or have non-dischargeable debts, such as student loans, you should also make those payments in full and on time every month.
Avoid Using All Available Credit
A large part of your credit score is your debt-to-available-credit ratio. Generally, the more available credit you have, the higher your credit score. Once you obtain a credit card, try to keep the balance to 20% or less of your total available credit for that card. Since balances may be reported at any time, you should keep your credit utilization low even if you pay the balance in full each month.
Apply for Credit Carefully
Once you have obtained a credit card or two, do not apply for additional credit unless you really need it. Every time you apply for credit, your credit score is lowered a few points. If you are trying to rebuild your credit, every point counts.
Do Not Close Accounts
Closing accounts reduces the amount of your total available credit, which lowers your debt-to-available-credit ratio. A lower debt-to-available-credit ratio, in turn, lowers your credit score.
Check Your Credit Report
Order a credit report from each of the major credit reporting bureaus (Transunion, Equifax, and Experian). By law, you are entitled to one free report from each of the major credit reporting bureaus each year. Visit annualcreditreport.com to obtain your free reports. Review the reports to ensure all information reported is accurate. Report any errors to the credit bureau, and they will investigate and likely revise your credit report. If you find you require assistance in disputing items on your credit report, Leech Tishman can help. Call us for a free consultation. We can discuss your situation and devise a plan of action.
Rebuilding your credit score after bankruptcy takes time. Your credit report will not improve overnight, but if you follow these steps the effects of bankruptcy will diminish over time and your credit will improve in much less than 10 years.
Crystal Thornton-Illar is a Partner in the Bankruptcy & Creditors’ Rights Practice Group and focuses on both commercial and consumer bankruptcy matters. Crystal can be reached at 412.261.1600 or by email at firstname.lastname@example.org.
Leech Tishman is a firm dedicated to providing full-service commercial legal services to individuals, businesses, and institutions. We combine a deep understanding of our clients and their businesses with skilled legal counsel to find solutions. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Los Angeles, New York and Wilmington, DE. For more information call 412.261.1600 or visit us at www.leechtishman.com.