Improving a Credit Score After Filing Bankruptcy
The first thing you need to do is to request copies of your credit reports from all three credit reporting agencies. If you have not requested copies of the reports in the past 12 months, you can obtain copies without charge by going through Annual Credit Report. You are entitled to a free copy of your credit reports every 12 months.
You should review your credit reports at least once a year for mistakes and errors. After your bankruptcy case is closed, you need to ensure that all accounts that were discharged through your bankruptcy case are notated properly in your credit reports. If you discover that a creditor is continuing to report an amount owed or late payments on a discharged debt, contact the creditor and the credit reporting agencies to correct the error. You might need to provide a copy of your bankruptcy forms and Order of Discharge to the credit reporting agency.
Continue to follow up with the creditor and the credit reporting agency until the information is correct. Even a small mistake on your report could prevent you from improving your credit score after bankruptcy.
How is My Credit Score Calculated?
According to FICO, your credit score is composed of five categories:
- Payment history = 35%
- Amount owed = 30%
- Length of credit history = 15%
- Mix of credit = 10%
- New credit = 10%
Any negative information reported on your credit history can cause your credit score to fall. For example, if you have several late payments, your credit score will fall. Because your payment history accounts for 35% of your overall credit score, delinquent payments can severely hurt your credit rating. However, you must also keep in mind that applying for new credit can also hurt your score even though this information only accounts for 10 percent of your score. Learning what is included in your credit score can be very helpful as you are working to improve credit scores after bankruptcy.
What is not in my Credit Score?
Likewise, it is also important to know what is not used to calculate your FICO scores:
- Personal information, including gender, age, race, marital status, color, religion, and national origin.
- Where you live or work;
- Your income or employment history;
- Interest rates and credit terms;
- Certain credit report inquiries; and,
- Information not found on your credit report.
It is important to remember that your bankruptcy filing will remain on your credit report for seven to ten years after the date of filing. However, the longer the bankruptcy is on your credit history, the less impact it has on your score. Recent abuse of credit, making late payments, and applying for new credit can harm your score more than an old bankruptcy case.
Things You Can Do to Improve Your Credit Score
If you have filed bankruptcy, our Prescott bankruptcy lawyers understand that you are concerned about your credit score. We encourage you to take reasonable steps to repair your credit rating after bankruptcy; however, we urge you to be patient. Rushing to incur credit can be risky if you have not recovered from the financial crisis that created the need for your bankruptcy filing.
Deciding to file a Chapter 7 or Chapter 13 personal bankruptcy is difficult. Now that your bankruptcy is behind you, it is time to focus on life after bankruptcy. Below are tips from our Prescott bankruptcy attorneys that may help you begin to rebuild your credit rating while avoiding some of the credit mistakes that could derail your efforts:
- Pay all bills on time. Late payments will quickly lower your credit score. Consider setting up automatic drafts, so you do not miss a payment.
- High outstanding balances can lower your score. Keep balances owed on revolving accounts around 30 percent of the credit limit or below.
- Do not close unused credit accounts with zero balances. Part of your credit score is based on the length of your credit history. If an old account was not closed after your bankruptcy, you should use the account to charge small amounts and pay the balances in full.
- Do not open new credit cards that you do not need. Be careful of stores that offer a discount on the first purchase for opening an account. The amount you save is generally not worth the interest you pay or the hit to your credit score for new accounts. Instead, use one or two major credit cards that offer points and other rewards.
- If you are opening a new credit account, search for a card that gives you the lowest interest rate with the most benefits, such as reward points, no annual fee, zero percent introductory interest rate, etc.
- Consider beginning with a secured credit card. You must place a deposit with the company for the use of the card; however, this might be the best option if you cannot qualify for a major credit card. Just make sure you choose a company that reports your good efforts to the credit reporting agencies.
- When you are ready, consider purchasing furniture on account or financing a vehicle. A good mix of credit will help raise your credit score. Just make sure that you can afford the payments without placing a strain on your budget. Always have an emergency savings fund to pay accounts should you have a temporary decrease or loss of income.
- Always use a personal budget. Budgeting is very important as you work to improve your credit history after a bankruptcy case. By using a budget, you can identify areas you need to improve and reduce spending when necessary, to avoid incurring credit or overextending your finances. Many online budgeting tools are available to help you create and live within a budget.
If you want more information about managing money wisely, you can visit the MyMoney website created by the Federal Financial Literacy and Education Commission.
Do You Have Questions About Bankruptcy and Credit Scores?
Call 602-777-3540 or use our contact form to schedule a free bankruptcy consultation with a Phoenix bankruptcy lawyer. We are happy to answer your questions about bankruptcy and analyze your financial situation to determine if a Chapter 7 or Chapter 13 bankruptcy filing is your best option for getting out of debt.