Just like anything else credit related, a bankruptcy can have a negative effect on your FICO score. As a matter of fact, it will be weighed against your FICO score for seven to ten years or until it falls off of your credit report. The good thing is that as time progresses the affect of your bankruptcy on your FICO score will not be as severe as it is when you first file for it.
Understanding your FICO Score
A FICO score is the most reliable credit score within the United States. Based solely on the 1956 credit model initially called Fair Isaac (named after its founders Bill Fair and Earl Isaac) a FICO score is a means of measuring credit risk. This method of scoring is widely used in credit reporting agencies in both the United States and Canada. The acronym “FICO” stands for “Fair Isaac Corporation." FICO has offices in North America, South America, Europe, Asia and Australia, and the company is headquartered in Minneapolis, Minnesota.
What Happens When You File Bankruptcy
Since FICO measures credit risk, with a bankruptcy on your credit report you will definitely see a significant fluctuation in your credit score. Your FICO score is based on payment history (35 percent of your score), debt to credit ratio (30 percent), average age of accounts (15 percent), types of credit (10 percent) and number of inquiries (10 percent).
Your bankruptcy hurts your payment history and shows up as a judgment against you. If your cards are closed during bankruptcy- and they likely will be - this also hurts the age of account history.
The good thing is that, despite having a bankruptcy, you can begin to re-establish your credit in good standing. Once you do this, your FICO score will be raised.
How to Raise Your Credit Score
It is important that you take the right steps as soon as you can when it comes to raising your FICO score.
- For example, as soon as you bankruptcy becomes eligible, you should take the proper steps to have the bankruptcy purged from your credit report.
- Get a credit card after bankruptcy, even if you can only qualify for a secured card, and begin paying on time to establish a good payment history.
- You should definitely consider checking your credit report monthly to make sure that creditors who you are paying in a timely manner are reporting your positive status to the credit companies. Sometimes creditors may forget to report that you are making your payments on time. Stay on them. The more your credit report reflects that you are doing right financially, the more apt your FICO score is to rise.
Getting Help
Before you file for either Chapter 7 or Chapter 13 bankruptcy, you should talk to a bankruptcy attorney about what your options are. He can tell you what affect the bankruptcy will have on your debt and on your FICO score and can advise you on what is the best way to proceed given the state of your finances.
