As part of my bankruptcy practice I must advise my clients how the filing of Bankruptcy will impact their credit. A Chapter 7 Bankruptcy will remain on their credit for 10 years. Most clients immediately think that means no credit in the next 10 years but that is simply not true. Although filing the case will reduce the credit score immediately there are ways to help your score recover from Bankruptcy. Here are some helpful habits:
- Stay on top of your report: Review your credit after the Bankruptcy discharge is entered and make sure the report is accurate. A credit report is a history of credit transactions so the Bankruptcy is not going to remove your former history but it will show $0.00 owed on debts that have been discharged. If a balance is still showing then you need to file an objection with the credit bureaus and demand the information be corrected. Another reason to review the report is to make sure you are not suffering the victim of identify theft.
- Pay the debts surviving Bankruptcy timely: If you have non-dischargeable debts then make sure the payments remain current. A common example of non-dischargeable debt is a student loan. Even though student loans are not dischargeable in Bankruptcy the fact that you kept (or re-established) a good payment history will boost the score faster than any other thing I can suggest. This is true because FICO scores are based in part on the age of your credit history (35% of your score is from payment history) and a student loan account could be the oldest item on your report. Also, stay away from forbearances and deferments, those hurt your score.
- Use credit wisely: It is common for credit card companies to solicit clients following Bankruptcy and offer lower credit limit cards. While this may seem like a blessing to get credit so quickly after a Bankruptcy, be careful and avoid the pitfalls. FICO scores are calculated by evaluating the use of credit. Up to 30% of your score is determined by the amounts owed versus the amount of the credit limit. If you use more than 30-40% of your available credit then FICO is going to calculate that use of credit as risky and ding your score because of it. For example, on a $500.00 credit limit credit card, if you use more than $150.00 – $200.00 a month then FICO is going to reduce your score instead of increase it. This is true even if you pay off the credit card each month. This is a common pitfall so don’t fall for it.
- Have an emergency fund: I am a huge Dave Ramsey fan and believe his first “baby step” is also the right step for anyone after bankruptcy. The first step is to save $1,000.00 in cash for emergencies. A pizza at 10:00 p.m. because you are hungry is not an emergency.
- Stay away from payday loans: Stay away from payday loans at all costs. Payday loans do not report to the credit bureaus, so having them won’t help (or hurt) your score. Many folks don’t know the interest they are charging. I have seen as high as 1200% which makes it is impossible to stay on top of and getting the loan is never something you will need if you have an emergency fund.
- Don’t get application happy: Applying for new credit is a necessity at times but know that if you apply too many times in a short period of time then the score will suffer. FICO sees too many new accounts in too short of time as risky. Try to spread out your credit applications and be careful which applications to choose.
Don’t get discouraged if a creditor denies your credit application. This process will take time and you can expect to pay a higher interest on certain loans after bankruptcy, but loans do exist. All of my clients receive a solicitation for a new car after filing. The program goes something like “we see that you filed a Bankruptcy but we have a program and can get you in a car today”. There are times when the “program” is a better financial choice than staying in an upside down car loan and it ultimately comes down to the choice between the lesser of the two evils.
If you have filed a bankruptcy then hang in there and don’t get discouraged. Have focus and spend the time to educate yourself on FICO scores and you will rebound your score in no time.