When faced with the decision of whether or not to file for bankruptcy, many people worry that it will ruin their credit score. This is not an unfounded fear. Bankruptcy will make your credit score drop, and it stays on your record for approximately 10 years. However, bankruptcy gives you a chance to manage your debts and to rebuild your credit score with a fresh start.
If you are currently unable to pay your monthly bills, and do not take steps to rectify it, your credit score will naturally decline. Declaring bankruptcy gives your credit score a onetime hit, but then you have the opportunity to rebuild and improve overtime. How will bankruptcy affect your credit score?
How far will your credit score drop if you declare bankruptcy?
Unfortunately, there is no exact answer to this question. The drop in credit score varies from person to person. In general, higher credit scores take a greater initial hit than lower credit scores.
The good news is, once you file for bankruptcy, you manage your debts so you can actually afford your monthly payments. Since you can afford to pay your bills, you can start rebuilding your credit score immediately after the dip.
What else can you do to rebuild your credit score?
In addition to paying your monthly bills, you can take several concrete actions to repair your credit score. None of them provides an immediate fix, but overtime they can all substantially improve your credit.
- Secured credit card.It can be difficult to get a credit card when you have a bad credit score. Look into setting up a secured credit card instead. Unlike a traditional credit card, secured credit cards require that you put down a certain amount of collateral. This lowers the creditor’s risk, and makes it easier for you to gain approval. A secured credit card allows you to develop a positive payment history that will gradually raise your credit score. As your score rises, you can increase your spending limits and upgrade to an unsecured card.
- Keep your credit utilization ratio low. Your utilization ratio is calculated by dividing your credit card balance by your total available credit. Keep your ratio at 30% or less each month. A low utilization ratio shows creditors that you are not maxing out your credit cards.
- Pay all bills on time. Paying your bills on time is one of the greatest factors in improving your credit score. It can be difficult to remember all of your monthly payments and due dates. Keep organized by writing down each payment amount and due date on your calendar. You can also program some of your bills to automatically pay online each month.
Filing for bankruptcy is a big decision; remember that it was designed to help you. Your credit score will take a hit, but you can rebuild it over time. You just need to show your creditors that they can trust you to pay your bills moving forward. If you are interested in filing for bankruptcy, contact an attorney who can walk you through the process and help you get back on your feet.