If you are planning to file for bankruptcy, which is as useful as other debt relief programs and feeling worried about its after effect on your credit ratings, then it’s important for you to consider a few essential details first. The general notion is bankruptcy remains on your credit report for 7 to10 years and the three digit number of your credit score which finally exhibits your creditworthiness gets affected by it. However if you understand a number of financial factors which play a crucial role in determining the effect of bankruptcy on your credit report, you can certainly minimize the effect of bankruptcy on your credit score and frame your finances in a better way. Creditors usually scan through your credit report to evaluate the credit risk they incur while offering you a loan or credit line. To find out how bankruptcy affects your credit rating you first need to understand how credit score works and on what basis your FICO score is calculated. Read on to know more about these financial factors which can help you to rebuild your credit score after bankruptcy.
Past Payment History
You might be surprised to know 35% of your credit rating depends on your past payment history which consists of bankruptcy filing and your late payment records. While you file bankruptcy it adversely affect your past payment history and consequently damage your credit score. However, after bankruptcy ideally the creditors that were discharged have no legal rights to report any negative information such as late payments, foreclosures or
repossessions on your credit report as these all take place after filing bankruptcy. It will certainly help an individual who have a long history of late payments to rebuild his credit history without having any discharged creditors spoiling your credit report.
Debt Amounts
30% of your total credit score is determined by the debt amount you carry. When the creditors weigh whether you can handle your debt responsibly or not, they often tally the amount of debt you have incurred from credit cards, mortgages and other loans with your available credit limit. Therefore, the debt amounts receiving a bankruptcy discharge have positive impact both on your debt amount and your credit report. The debts that have been already discharged through bankruptcy are no longer are regarded as valid obligations that you have toward the creditor, therefore the debt amounts is reported as a $0 balance. This bankruptcy discharge often results in an increase in your credit score, especially when the balances on your credit report being listed as $0.
Credit History, Credit Mix
15% of your total credit score is decided by the duration of your credit history which indicates how long an account has been open and the most recent transaction in the account. 10% of your total credit rating is influenced by your credit mix. Credit mix denotes the types of credit accounts you currently have. If you have a variety of credit accounts it certainly works in your favor when potential creditors assess your credit.
After declaring bankruptcy almost all of your credit accounts get closed. As a result both credit history and your credit mix get affected considerably. However, after filing bankruptcy if you apply for new credit accounts you won’t face much difficulty to reestablish a credit history with a mix of accounts.
If you have fighting spirit and a strong urge to bounce back you can not certainly recover your credit scores from a bankruptcy filing and can lift your FICO score after receiving a discharge. Remember, you need to attain at least 2 to 3 years of positive reporting history, in order to reestablish your credit history. The effect of bankruptcy on your credit score is largely dependent on the choices you make and the credit history you decide to create after filing bankruptcy.