Credit and bankruptcy ratings: what effect will it have and what should I do next?

For a person with an 8-year credit history, credit cards at half the maximum, and a current score of 680, bankruptcy will lower their score by 130-150 points.

For a person with a 15-year credit history, low credit card debt, and a current score of 780, bankruptcy will lower your score between 220 and 240.

When it comes to credit, it is important to remember that bankruptcy affects different consumers differently. For minor issues like late payments, having a long, positive credit history is a great benefit because a late is just a small negative drop in a large group. On the other hand, bankruptcy is a major problem. The consumer with the best credit is the hardest hit, as noted above. They have spent a long time filling their pool, so they have the most to lose when it drains, so to speak.

By law, credit bureaus can report bankruptcies for 10 years; however, all have agreed to report only on a successfully completed Chapter 13 for 7 years. Of course, this means that Chapter 7 affects credit for 10 years. 7 or 10 years seems like a long time, but as time goes on, bankruptcy has less of an effect. With proper credit management, the consumer can have decent credit in 1 to 2 years.

The best thing to do after bankruptcy is to immediately start maintaining an excellent payment history, possibly with a secured credit card. When someone applies for credit after bankruptcy, the lender is looking at how they behave immediately after the bankruptcy is completed. Everyone knows that bad things happen to good people. If this is the case, the consumer has far fewer obligations and must resume payments on time. Similarly, when applying for a mortgage, the lender may take into account a history of hardship. For example, “Medical bills piled up and we filed for bankruptcy. But we had good credit before and after,” is a very compelling story.

FICO even takes into account “bad things that happen to good people,” so to speak. When calculating a score, consumers are not compared to the general population; they are compared to people in a similar situation. Once a bankruptcy is completed, the consumer is compared to everyone else who has just completed a bankruptcy. FICO is looking to predict how various consumers in the post-bankruptcy category will pay their new bills. If your payment history is very good after bankruptcy, then it must be someone who really deserves good credit but has had a series of unfortunate events; therefore, if you continue to make payments on time, your score will improve rapidly.