What is the Impact of Bankruptcy on Credit Scores and Tips to Rebuild the Score?
Bankruptcy is declaring that you are no longer able to pay your debts, and it has a huge impact on your credit score. A credit score basically revolves around a credit history that provides information regarding the number of accounts, total level of debts, repayment history and other such factors. If a company or an individual declares bankruptcy, then this credit history is affected, and it may affect them in building the trust again.
So, it is important that one maintains one’s credit score and does not reach the verge of bankruptcy. However, if there is a bankruptcy case, what will be the significant impact on credit scores in California? If you want to know the answer to this question, then we will discuss it in detail in this article. We will also discuss some tips for rebuilding credit scores. You can also consult your bankruptcy lawyer California to know more about the credit score and how to rebuild it.
What is the Impact of Bankruptcy on Credit Score?
A credit score is a prediction about a person’s trustworthiness and ability to repay a debt. It indicates how likely you are to be able to pay back your loan on time based on information from the credit reports. So, if there is a bankruptcy, then it will have a huge impact on the credit score. Let’s discuss some of the significant impacts of bankruptcy on credit scores.
- Drop in Credit Score: If you are filing for bankruptcy, then it will lead to an immediate drop in the credit score, typically between 120-300 points. The impact may vary depending on various factors such as initial credit score and the type of bankruptcy filed. However, the immediate effect, irrespective of the factors associated with it, would be a drop in credit score.
- Remains on Report: Once there is a filing of bankruptcy, it stays on your credit report for a number of years. A Chapter 7 bankruptcy stays on the report for ten years, and Chapter 13 remains for seven years. Thus, during this period, it becomes difficult to regain the trust of creditors, which negatively impacts the borrower’s seeking credit or loans.
- Limited Access to Credit: Bankruptcy makes it difficult to regain the trustworthiness of the creditors. Once individuals file for bankruptcy, lenders consider them high-risk borrowers, which makes it challenging for them to access credit lines or loans. If, in any case, credit is approved, it comes with a higher interest rate, which is not a favourable condition for the borrowers.
- Re-establishing Credit: Bankruptcy may have an immediate impact on your credit score, but you can regain trust through responsible financial behaviour. This may involve paying bills on time, keeping credit card balances low, and slowly applying for new credit cards once your financial situation improves.
How to Rebuild the Trust for Credit?
- Create a Budget and Stick to it: Bankruptcy situations mainly arise when there is no adherence to the budget. So, once you have filed for bankruptcy, you must take care of your budget. It is an important element for regaining the trust of the creditors. It would help if you tracked your income and expenses to ensure that there are no future financial pitfalls.
- Build Emergency Funds: You can build emergency funds to save money for emergencies. This emergency fund will help cover unexpected expenses without relying on credit, and it will also prevent you from accumulating new debt.
- Apply for Secured Credit Cards: You can apply for secured credit cards, which will require a minimum amount of deposits in your account. This deposit will serve as your credit limit, and therefore, it would be a better way to regain your credit score. However, you have to make responsible use and on-time payments for your credits to rebuild the trust.
- Pay Bills on Time: Payment history plays a significant role in your credit score. Therefore, you must ensure that you are paying all the bills on time, such as utility bills, rent, and other bills. If you are consistent in these payments, then your credit score will gradually improve.
Bankruptcy indeed impacts your credit score, but it is not the end of your financial journey. You can rebuild your finances by understanding the effects and taking proactive steps to regain economic stability.