Whatever the circumstances that led to your current financial crisis, chances are you are exploring every possible option for getting yourself out of it, including bankruptcy. You may know that a successful bankruptcy can provide a path to a debt-free future. However, you may also have heard that if you file for bankruptcy, your credit score will take a major hit.
It is wise advice to keep an eye on your credit score. After all, your credit rating is a critical part of obtaining a loan you may need to buy a car or to get a mortgage on a house. While you may be in no position to consider either of those purchases, you may hope to be in the future, and a negative credit rating could prevent you from reaching your goals. However, do you know where a credit score comes from?
What is your credit score?
Your credit score is based on a protected formula called FICO, which stands for Fair Isaac Company, the organization that developed the algorithms that produce credit scores used by credit reporting agencies like Experian, Trans Union and Equifax. While it is not public knowledge how they work, the formulas calculate these factors:
- Your history of missed and late payments
- How much you owe to creditors
- How long you have had credit
- How much recent credit you have obtained
- The various types of credit you have
Since the largest portion of this equation comes from your total amount of outstanding debt and your payment history, it is highly likely that your credit score has already taken a hit. You may have maxed out credit cards and missed numerous payments. If your score is already low, the bankruptcy will not make it better, but many people find their scores hover around 550 when they emerge from bankruptcy.
It’s not just about the numbers
When your potential creditors access your credit report, they see more than just a number. They see the complete history of your debts, those accounts that are in default, those that you successfully paid off and those that creditors discharged through bankruptcy. Therefore, it is not really the low number that may affect your future credit opportunities but the bankruptcy itself. This may affect your rating for up to ten years.
However, there are numerous ways to begin rebuilding your credit score right away. Many consumers find they are able to bring their number up within two years of a bankruptcy, and this is something positive that future creditors look for. Rather than letting fear keep you from seeking the answers you need, you may find peace of mind in consulting with a Texas bankruptcy attorney.