Today is Day 7 of 30 Day Credit Tips – How Bankruptcy Affects Your Credit Score.
Chances are if you seriously considering bankruptcy your credit score may already be in bad shape. Bankruptcy will remain on your credit report up to 10 years. Bankruptcy negatively affects your credit score, here’s why:
- Bankruptcy is a legal proceeding for a person that can’t pay his/her bills to get relief from their debt. When an individual files for bankruptcy he or she is not able to pay their bills, this affects 35% of their credit score.
- It allows for individuals or businesses to either restructure their debt to back it back in payment plans or have most of their debts absolved completely.
- The goal is to have a long history of paying your bills on time across a mix of different accounts.
Below is a diagram that depicts how your credit scores are calculated:
- Payment History makes up 35% of your credit score: This shows whether you make payments on time, how often you miss payments, how many days past the due date you pay your bills, and how recently payments have been missed. The higher your proportion of on-time payments, the higher your score will be. Every time you miss a payment, you negatively impact your score.
- Amounts Owed makes up of 30% of your credit score: This is based on the entire amount you owe, the number and types of accounts you have, and the proportion of money owed compared to how much credit you have available. High balances and maxed-out credit cards will lower your credit score, but smaller balances can raise it – if you pay on time. New loans with little payment history may drop your score temporarily, but loans that are closer to being paid off can increase it because they show a successful payment history.
- Length of Credit History makes up 15% of your credit score: The longer your history of making timely payments, the higher your score will be. It may seem wise to avoid applying for credit and carrying debt, but it can actually hurt your score if lenders have no credit history to review.
- Credit Mix make up 10% of your score: Having a mix of accounts, including installment loans, home loans, and retail and credit cards may improve your score.
- New Credit makes up the final 10% of your score: If you’ve opened a lot of accounts recently or applied to open accounts, it suggests potential financial trouble and can lower your score. However, if you’ve had the same loans or credit cards for a long time and pay them promptly – even after payment troubles – your score will go up over time.
Once you file bankruptcy and the details have been finalized it is imperative that you get to work on rebuilding your credit history by paying your bills on time, not applying for excessive credit and watching your credit utilization to ensure you are using a small percentage of your credit limit.
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