Bankruptcy is the legal status of a person or company that cannot repay a debt owing to creditors. It could happen if you have suffered a significant loss in your business, lost a job, or been involved in an accident that has rendered you paralyzed or crippled. When a person declares bankruptcy, his Credit score drops, and a low credit makes it very impossible to obtain additional credit. Your bankruptcy will appear on your credit report for up to ten years.
It is difficult, but not impossible, to obtain credit following bankruptcy. If your Bureau report mentions bankruptcy, it indicates you’ll have to pay more to borrow more. However, bankruptcy should allow you to start over and begin saving because all of your debts will be discharged. Create a sizable emergency fund.
What is Bankruptcy and Its Relation to Credit Score?
Bankruptcy is the legal status of an individual or business that cannot repay a debt owed to creditors. It could happen if you have suffered a large loss in your business, lost a job, or been in an accident that has left you paralyzed or disabled. When a person declares bankruptcy, his Bureau score declines, and a low Bureau score makes obtaining new credit impossible. For up to 10 years, your bankruptcy will reflect on your credit report.
Before you start working on improving your low credit report, you should first grasp what it is and why it is so important to your financial future. When you apply for credit of credit cards, auto loans, mortgage or rental agreements, and student loans, the financial institution first checks your Credit report to determine whether or not to lend to you. When making lending decisions, many lenders take FICO ratings into account. If your credit score is in the mid-700s or higher, it generally indicates that you have good credit and should have no issue getting approved, assuming you meet the lender’s other requirements.
Tips to Improve Credit Score After Bankruptcy
If you are unable to repay your obligation, you may be declared bankrupt. It can even reflect in the event of a significant loss in business or financial assistance that helps you sail through your daily life or big economic courses. When you declare bankruptcy, your Bureau score drops, and obtaining additional credit becomes nearly difficult. Worse, a bankruptcy will remain on your credit report for at least seven years.
You can also recover from bankruptcy and create a good credit report by taking the following steps:
Apply for a Secured Credit Card: Secured credit cards are available against a fixed deposit. Typically, the credit is a percentage of the amount retained in a fixed deposit. Following this step will help you improve your credit score. When you acquire this credit card, make sure you make your payments on time. If you do not miss or delay payments, your credit score will progressively improve.
Regularly review your Credit report: Receive your Bureau report information on a regular basis, perhaps once or twice a year. Pay close attention to the details in the report and file a dispute with Bureau if you find any contradictions or inaccuracies.
Obtain an Affordable Loan: After a comfortable period of time, say one or two years, following your bankruptcy, take an affordable or modest loan that you can easily repay. Lenders may continue to demand high-interest rates, so choose your loan package wisely.
Keep Credit Cards Active: Do not close any credit cards simply because you were once bankrupt. Make on-time payments on your credit card bills to improve your credit score.
Pay Your Bills on Time: Your payment history accounts for 35% of your credit. As a result, credit card and loan payments should be made on time.
Do Not Excess Credit Limit: Spend carefully and prevent financial default while maintaining strictly within the credit limit set.
Never Use Credit Repair Services to Improve Your Credit Score: Such services are costly and may be fraudulent, so use caution while making your decision. Try to improve your credit report on your own because you will be kept up to date on your credit history and behavior without paying a charge.
How Long Does It Take to Rebuild Your Credit After Bankruptcy?
When you declare bankruptcy, your credit score plummets dramatically, and you may wind up with terrible credit (below 500). As a result, it may take some time to raise your credit score to the ‘Good’ category, which is 750 or above. According to experts, if you work consistently to rebuild your credit after filing for bankruptcy, it could take up to 24 months to raise your credit score to the ‘Fair’ category, which is 650 or higher. When your Credit report exceeds that threshold, it will be relatively easy for you to qualify for a loan, albeit at a hefty interest rate. You might, however, choose a secured loan with a down payment to expedite the process. Regardless, trying to raise your Credit report to 750 or even higher can be a whole different ball game, and it could take up to 3-4 years to get there, assuming you work diligently on rebuilding your credit.
What is the Formula for Calculating a Credit Score?
TransUnion Bureau, Experian, and CRIF Highmark all use various scoring methodologies to compile credit report data. If you wish to check your Credit score online, these services will supply you with reports. These scoring models use a variety of components to calculate an individual’s credit report, and the importance of each element on the final credit report varies depending on the scoring model used.
This is why, while having the same credit history, the same person will receive a different score from each CIC. It may have a low Credit score, but it will no longer be low if you work hard to improve your score. This is due to the fact that credit bureaus each have their own proprietary technique for determining a person’s credit report and the specific breakdown.
Why is it Important to Keep a Good Credit Score?
Though a person’s credit score is not the only element evaluated by lenders when granting credit, it is one of the first factors reviewed by lenders when examining loan applications. A poor Credit score has a negative impact on your credit report. Having a good credit score offers several advantages. A Credit report check can be performed online to determine your scores, and some of the advantages of having a good credit report are as follows:
A high credit report indicates good credit behavior, greater creditworthiness, and reduced risk for the lender, increasing the likelihood that your loan application will be approved.
- Loans are promptly and simply approved.
- Loans with pre-approval are available.
- A good credit score permits you to get credit in better conditions. You can bargain more effectively and secure financing at lower interest rates for the appropriate quantity and term.
- Apply for credit cards with higher rewards and benefits.
- Increase the limit on your credit card.
- Get a break on processing fees and other expenses.
When you apply for a Loan, What Should You Do to Maintain Your Credit Score?
Following the steps below can help you maintain or improve your low Credit score:
- Maintain a close eye on your credit utilization ratio. Keep your credit card balances between 15% and 25% of your total available credit.
- Pay your bills on time, and if you must be late, do not exceed 30 days.
- Don’t open too many new accounts at once, or even within a year.
- If you want to make a significant purchase, such as a home or a car, that may demand a loan, check your credit score six months in advance. This will give you enough opportunity to correct any errors and, if necessary, improve your score.
- If you have a low credit score and a poor credit history, don’t give up.
- Simply start making better choices, and you’ll see consistent improvements in your score as the negative items in your history fade away.
Rebuilding your credit profile after filing for bankruptcy can be a difficult and a time-consuming task, but keep in mind that it is doable. All you have to do is be incredibly financially disciplined and never default on any of your credit obligations again.
Share this article on WhatsApp