Improve Your Credit

Improve Your Credit Report: Stop the Bleeding

A bankruptcy is the worst thing you can do for to improve your credit, right?

It may be true that a Chapter 7 or Chapter 13 bankruptcy will not improve your credit—or it may be less true than you might think.

While it is true that a bankruptcy filing, either a Chapter 7 or a Chapter 13 bankruptcy, will remain listed in the “Public Records” section of your credit-report for 10 years from the date of the filing of the bankruptcy, it may be that there are some not-as-well-publicized up-sides to the filing of a bankruptcy petition when it comes your credit.

First, it is important to differentiate between your  credit report and your credit score.

 

Improve Your Credit: Your Credit Report

The bankruptcy will be listed on your credit-report, available to view by anyone reviewing your report in the consideration of whether to open a line of credit for you after your bankruptcy discharge. This is a black mark on your credit-report, no doubt about it.

However, a bankruptcy filing can have an unintended beneficial impact on your credit-report as well. If your credit is already suffering due to prior judgments, garnishments, lawsuits, short sale, foreclosure, missed installment payments, or other negative reporting incidents, the filing of a bankruptcy may not have much impact to begin with. You have already taken the damage you are going to take, and a bankruptcy filing is only going to be good for you at this point.

If your credit report is continuing to reflect ongoing financial hardship, the filing of a bankruptcy that discharges your debt and, thereby, dramatically improves your debt-to-income ratio is actually going to help your credit report. It will draw a line through your credit timeline: on one side of it, you had too much debt, too many missed or late payments, too many problems, and were a bad credit risk; on the other side of it, you had no or little debt and only have ongoing positive reporting, no more negative reporting.

You have “stopped the bleeding” with your bankruptcy, in other words, and you can, after your bankruptcy, begin to rebuild your credit with positive reporting form that point forward.

 

Improve Your Credit: Your Credit Score

Your FICO score, or credit-score, is the 3-digit numerical representation of your credit worthiness that many lenders consider first and foremost when deciding to open a line of credit for you. Anything above a 700 is considered to be a fairly positive FICO score. If you have too much debt relative to your income and too many maxed-out credit lines, you are likely to have a much lower FICO score.

Although the exact formula behind the FICO score is a trade secret by the Fair Isaac Corporation that developed it, it’s pretty clear that the FICO score relies primarily on 2 considerations: debt-to-income ratio and available credit.

If a bankruptcy does nothing else, it improves your debt-to-income ratio. Before the bankruptcy, you had a lot of debt. After the bankruptcy, you had little or no debt. This will positively affect your FICO score.

If you play your cards right after your bankruptcy, cautiously but carefully utilizing new credit, never missing a payment, and not maxing out new credit cards, you will very likely see a jump in your FICO score after the initial dip your bankruptcy will likely cause it anywhere from 30-70 points or more in your FICO score in the 15 months or so following your discharge.

If you are considering filing for bankruptcy, contact The Hilla Law Firm, PLLC to schedule a free, initial consultation.

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