The Fair Isaac Corporation's FICO score is the primary assessment tool that banks use to determine loan eligibility. Declaring bankruptcy has a strong impact on your FICO score and your ability to borrow in the future. However, borrowing won't be impossible, and your score may even be higher. Understanding your score and how bankruptcy affects it can help you recover.
Understanding Your FICO Credit Score
Your FICO credit score is a three-digit number---ranging from 300 to over 800---that predicts how risky you are as a borrower. Sixty-five percent of the score is comprised of your history of on-time payments and current balances. The remaining 35 percent is a mix of the length of your credit history, the types of credit you have (credit cards, mortgage, car payment), and the amount of new credit you've received.
After Bankruptcy
If you were not paying your bills before you declared bankruptcy, your score was already very low. "Good" credit begins with a rating around 680, but a credit score after bankruptcy could be as low as 500. Your credit report after bankruptcy will show "0" balances on your accounts, and because the old debts that were dissolved during the bankruptcy proceeding were eliminated, they have no future hold on your income. As a result, you become a better loan risk, and your score may improve slightly.
Factors Affecting the Score
The reason for filing is important. If you declared bankruptcy as a result of unpaid medical bills or to escape a bad home loan, you will have an easier time improving your credit. If your filing was because of unpaid credit card bills or chronic overspending, it will be more difficult. Credit cards are the driving factor behind the FICO score, so a large number of accounts with late payments and large balances will drive your rating down.
Effects of Bankruptcy on Future Loans
Your credit score is the primary factor that determines your eligibility for new loans, and it will be low for at least two years after you file. Plan to pay more interest and fees as a result. Credit cards will be difficult to obtain, and you may need a secured credit card---where the entire credit line is deposited in cash as collateral---at the beginning. Lenders like to see a mix of loans, so an installment loan for a car or home is helpful. Make your payments on time and in full, and don't have too much credit.
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