Does Filing Bankruptcy Help a Credit Score

Your credit score is the snapshot that lenders will use to get a closer look at your financial picture. Having a bankruptcy on your credit report will create a blemish on that financial picture for the next 7 to 10 years. That's not to say every lender will refuse to extend credit to you. In fact, some lenders will seek out your business within months of a bankruptcy. This is because the lender knows that you cannot file bankruptcy again for the next five to six years, so he will extend credit to you. However, the interest rate will be sky-high, due to your newfound "un-creditworthiness." Also, paying high interest rates is not the only consequence you will suffer after filing bankruptcy; your credit score will also be affected.

Function

When you file bankruptcy, you are essentially telling your creditors that you have no financial recourse to pay them. Your credit score will immediately be reduced by at least 200 points. But in most cases, if you had to file bankruptcy, you were not paying your bills on time anyway, so chances are your credit had already been affected by defaults. However, if you did find a way to maintain a good credit score before filing bankruptcy you should expect a significant decline afterward. That being said, the bankruptcy and some of its penalties will remain on your credit report for at least the next 7 years, so be sure it is your only alternative before making this kind of financial decision.

Effects

A bad credit score can greatly affect your livelihood. Not only will it be difficult for you to obtain a credit card, you may also have trouble securing employment, an apartment, insurance, or even renting a car. However, at times, a bad credit score is unpreventable. You may have suddenly become sick, divorced or widowed, or lost your job. These are circumstances that were out of your control. But repairing your credit score is within your control.

Considerations

One way to improve your credit score after filing bankruptcy is by opening up a secured credit card. (Before doing so, you have to wait until the bankruptcy has been discharged.) A secured credit card works the same way that a regular credit card works, but the credit line is secured by a deposit that you supply. Your credit limit will usually be equal to the amount of your deposit.

Warning

There are plenty of banks and financial institutions that offer secured credit cards, but you need to choose wisely. You should first ensure that the card issuer will report credit activity to the three major credit reporting agencies (Equifax, Experian and Trans Union). In addition, you should choose a provider who will offer periodic credit increases after you have proven that you can be trusted with credit.

Prevention/Solution

Be sure to exercise financial responsibility. Once you have shown a few creditors that you are creditworthy, you will become inundated with credit card and other offers. Be strong enough to say no to most of the offers. Use your bankruptcy as a life lesson. Some people decide to file bankruptcy a second time because they have continued to make the same financial mistakes.