For many, having a good credit score makes life a bit easier. In fact, according to Experian, a credit score over 700 may qualify you for low-interest credit cards, insurance discounts, utility security deposit waivers and other perks.
While the major credit reporting bureaus are notoriously secretive about the formulas they use to calculate credit scores, all frown on bankruptcies. Consequently, you can expect your credit score to fall after a bankruptcy filing. Eventually, though, your bankruptcy may cause your credit score to rise.
Your delinquent accounts
If you miss enough payments to your creditors, they may report your accounts as delinquent. Delinquent accounts can take a tremendous toll on the health of your credit score. During the bankruptcy process, the court may discharge some of your delinquent debts. While discharged debts still appear on your credit report, they keep delinquent ones from doing ongoing damage to your credit score.
Your debt-to-income ratio
Your debt-to-income ratio also plays an important part in your overall credit score. This ratio compares how much revolving debt you have to your gross monthly income. If bankruptcy allows you to discharge debts, your debt-to-income ratio is likely to improve.
Your commitment to financial freedom
Filing for bankruptcy gives you the opportunity to make a fresh start. If you have a firm commitment to securing financial freedom, you may be able to create a budget that keeps you out of debt. If you stick to the budget, your credit score may climb over time.
While your first post-bankruptcy glance at your credit report may cause you to shudder, you should not panic. Ultimately, if you use the process responsibly, bankruptcy may be the first step in fixing your credit score.