Credit Report Vs Credit Score: Impact of Filing Bankruptcy
Many people who are considering filing for bankruptcy want to know what the impact of filing
bankruptcy will be on their credit report and credit score. In this article we will discuss the differences and the impacts to both.
What Makes Up Your Credit Report vs. Credit Score
In a nutshell, your credit report is the vehicle which reports your credit score. Contained within your credit report are various aspects of your credit including information from banks, utilities, credit accounts, debt collectors including credit cards, loans, mortgages, and other accounts which may be reporting on your credit. These reports are what make up your score.
Your credit score is a grade which other credit agencies will use as a baseline to determine your credit worthiness when you apply for new credit. Credit reports contain other information such as on-time payments, delinquencies, liens, and bankruptcy filings.
Some negative reporting will fall off your credit report after three years such as late pays, slow pays, missed payments and hard inquiries. Hard inquiries are hits to your credit report from applications for credit where you give the bank or lender permission to obtain a copy of your credit report so they can review it prior to offering you credit or declining your application.
Other things stay on your credit longer such as repossessions, foreclosures, and tax liens, which may stay on your credit for seven years or longer. A chapter 7 bankruptcy stays on your credit report for ten years. Chapter 13 bankruptcy stays on your credit report for seven years.
How Do I Know What’s on My Credit?
Everyone is entitled to a free credit report check from the major credit reporting agencies once every twelve months. The three major credit reporting agencies are Transunion, Equifax and Experian.
Use your free credit score check to know what’s on your credit. Once you have a copy of your credit report, look for any missed or incorrect reporting. You can challenge those incorrect entries by writing to the three major reporting agencies. Eliminating wrong or inaccurate reporting can increase your credit score.
Credit Score Check
Your credit score plays a crucial role in your financial well-being. It determines your creditworthiness and influences your ability to secure loans, obtain favorable interest rates, and even rent an apartment. That’s why it’s important to regularly check your credit score and monitor your credit health.
You can obtain a free copy of your credit report via the internet by going to www.annualcreditreport.com. There are many apps you can download to your phone to review credit such as Credit Karma. You can keep tabs on your credit through these apps.
How Can I Get the Best Possible Score?
There are many things you can do to improve your credit score. Here are some ideas:
Keep your payments current
Paying your bills on time keeps the credit reporting agencies
from reporting anything negative on your report. The practice of paying your bills on time shows credit lenders that you are more likely to pay and therefore it increases your score.
One way to start rehabilitating your lower score is to pay bills on time. The more you pay on time and paying consistently, the higher your score will go.
Don’t run up your credit limits
If you are using credit cards to help increase your credit score, it is important that you do not utilize more than thirty percent of all available credit. Once your credit usage begins to creep up over the thirty percent threshold, your score will decrease. Overuse of credit shows the lenders that you might be struggling to pay your bills and are using credit instead of cash to stay afloat. It’s a red flag for lenders. Keep the limits low or ask your current lenders for a credit limit increase so you can bring down the percentage of utilized credit.
Don’t have too many hard inquiries
If you are trying to establish credit, be patient. Having a lot of hard inquiries looks like desperation to lenders. If you are applying for similar types of credit like a car loan through various lenders, it may be overlooked if the inquiries were all within a thirty day or less period.
However, if you have been applying for credit cards or personal loans, then try for something more like a mortgage or car loan, those other hard credit inquiries will lower your score.
How Do I Rebuild My Credit Score After Filing for Bankruptcy?
While filing for bankruptcy, all credit accounts must be disclosed. If you are filing for chapter 7 bankruptcy, those accounts are going to be closed once you file your case. Same for chapter 13 bankruptcy.
If you have a credit account with a zero balance, you may not need to include the account in your bankruptcy, but all creditors run periodic checks on their customers. It’s inevitable that they will find your bankruptcy. When they do, expect that account to be closed by the lender.
So, you filed for bankruptcy and want to rehabilitate or increase your current credit score.
There are many ways to do it. If you recently filed for bankruptcy, be patient, there will be offers coming to you soon. You will see them start coming in your mailbox as you get closer to your discharge.
Take a look at the credit lenders offering you a new credit card. Apply for a few of them. You can get either a secured or unsecured card. Chances are greater of being approved for a secured card.
You will likely be approved for a small spending limit. Use less than thirty percent of what you were approved to use. Pay it off each month, if possible. Repetitive on time payments will greatly increase your credit score.
Consistent on time payments will have your score back in the “good” range in about eighteen months to two years.
Filing for bankruptcy is not the end for your credit. While it might take up to ten years for a chapter 7 bankruptcy to fall off your credit report, you can generally rebuild within two years. In many cases, you can buy a new car almost immediately after getting your chapter 7 discharge.
Buying a new home can be done after two years post-bankruptcy, if not sooner. If buying a home is your goal, contact a mortgage broker to see what programs you might qualify for to help with securing a mortgage loan.
Save money for a down payment. If you must wait two years before you can buy, save up money for the down payment while you are waiting and while you are rehabilitating your credit score. Also, military veterans are given extra benefits through the VA.
Remember that filing for bankruptcy will not completely destroy your credit rating forever. The time it takes to rebuild your credit ranking is relatively short and anyone can do it, including you.
If you are considering filing for bankruptcy, please give us a call today at 623-777-4760
We have offices in Glendale, AZ and Phoenix, AZ. We will schedule you for a free consultation to discuss your debt situation.
Frequently asked questions
How long do financial records remain on your credit report?
Financial records typically remain on your credit report for a certain period of time, which can vary depending on the type of information. Here are some common durations:
Credit accounts: Generally, credit accounts such as credit cards, loans, and mortgages stay on your credit report for up to 7 to 10 years from the date of last activity or the date of account closure, depending on the credit reporting agency and the specific account.Late payments and delinquencies: If you’ve had late payments or delinquencies, they can stay on your credit report for up to 7 years from the original delinquency date.
Bankruptcies: Chapter 7 bankruptcies may remain on your credit report for up to 10 years from the filing date, while Chapter 13 bankruptcies may be reported for up to 7 years from the filing date.
Public records: Other public records, such as tax liens and civil judgments, can remain on your credit report for up to 7 years from the filing date.
Do credit reports affect credit score?
Yes, credit reports have a significant impact on your credit score. Credit reports provide the information that credit scoring models use to calculate your score. If the information in your credit report reflects responsible borrowing and timely payments, it generally has a positive effect on your credit score. Conversely, negative information like late payments, high levels of debt, or collections can lower your credit score.
How is credit score calculated?
Credit scores are calculated using various algorithms, and the specific formulas used by credit scoring models may differ. However, the most widely used credit scoring model is the FICO score, which considers five main factors:
Payment history (35%): This factor assesses your track record of making on-time payments and the presence of any late payments, delinquencies, or public records.
Amounts owed (30%): This factor takes into account the amounts you owe across different types of accounts, your credit utilization ratio, and the proportion of available credit you’re using.
Length of credit history (15%): The length of your credit history considers the age of your oldest account, the average age of all your accounts, and the time since account activity.
Credit mix (10%): This factor examines the variety of credit accounts you have, such as credit cards, loans, and mortgages. Having a diverse mix of credit can positively impact your score.
New credit (10%): Opening new credit accounts or having multiple credit inquiries within a short period can slightly lower your credit score.
Why does a credit score drop?
Several factors can contribute to a drop in your credit score. Some common reasons include:
Late or missed payments: Failing to make payments on time or missing payments altogether can significantly lower your credit score.High credit utilization: Utilizing a large portion of your available credit limit can negatively impact your credit score, as it suggests a higher risk of overextending your finances.
Public records and derogatory marks: Negative information like bankruptcies, tax liens, collections, or judgments appearing on your credit report can cause a significant drop in your credit score.
Closing old accounts: Closing older credit accounts reduces the average age of your accounts and can potentially lower your credit score.
Applying for new credit frequently: Multiple credit inquiries within a short period can indicate a higher risk of financial instability, leading to a decrease in your credit score.
Which entries on a credit report will decrease your credit score?
Certain entries on a credit report can negatively impact your credit score. These include:
Late payments and delinquencies: Payment history is a crucial factor in credit scoring models, and any instances of late payments or delinquencies can lower your credit score.
High credit card balances: Carrying high balances on your credit cards, particularly in relation to your credit limits (high credit utilization), can lower your credit score.
Collections and charge-offs: Accounts that have been sent to collections or charged off due to non-payment are negative entries that can significantly impact your credit score.
Bankruptcies and foreclosures: Having a bankruptcy or foreclosure on your credit report can cause a significant drop in your credit score.
Tax liens and civil judgments: Unpaid tax liens and civil judgments can also have a negative impact on your credit score.
What should you look for on your credit reports?
When reviewing your credit reports, it’s important to check for the following:
Accuracy of personal information
Ensure that your name, address, Social Security number, and other personal details are correct and up to date.Account information
Review the details of your credit accounts to ensure accuracy, including the payment history, credit limits, and balances.Payment history
Check that your payment history is correctly reported, with no inaccurately recorded late payments or delinquencies.Public records and derogatory marks
Verify that any public records, such as bankruptcies, tax liens, or civil judgments, are accurate and up to date.Inquiries
Check for any unauthorized or unfamiliar credit inquiries, as they could indicate potential fraud or identity theft.If you find any inaccuracies or discrepancies on your credit report, you should promptly contact the credit reporting agency to dispute the errors and have them corrected.
What is a good credit score in a report?
A good credit score typically falls within a specific range, although the exact range can vary slightly depending on the credit scoring model used. The most commonly used credit scoring model is the FICO score, which ranges from 300 to 850. Here is a general breakdown of credit score ranges:
Excellent: 800 and above
Very Good: 740 – 799
Good: 670 – 739
Fair: 580 – 669
Poor: 579 and belowHaving a good credit score, generally considered to be in the range of 670 and above, is advantageous when applying for credit. It indicates to lenders that you are a responsible borrower and increases your chances of being approved for loans or credit cards with favorable terms, such as lower interest rates.
However, it’s important to note that different lenders may have varying criteria and standards for what they consider a good credit score, so it’s always a good idea to check with the specific lender or creditor to understand their evaluation process.
