As hard as this may be to believe, filing bankruptcy can actually increase your credit score. It typically adds as much as a hundred points or more to your score by getting rid of debt you could not pay off--making you tens of thousands of dollars richer.
If that’s the case, here’s a question that begs to be asked:
How important is your credit score, anyway?
First, let’s look at how it is determined. According to experts, your credit score is figured this way:
- 35% of your score is based on your debt history.
- 30% is based on your debt level.
- 15% is based on the length of time you’ve been in debt.
- 10% is based on new debt.
- 10% is based on type of debt.
As you can see, winning the lottery will not have any immediate effect on your score. That’s because credit worthiness is not directly based on personal wealth or income, but on your outstanding debt and payment history.
Some top financial advisors have suggested that credit score is not as important as many people think. It is a factor in buying a home or car, but it is usually not the only factor. They suggest you can purchase a home with just about any credit score, if you do the following:
- Put down 20% down on your home.
- Choose a 15-year, fixed-rate conventional mortgage.
- Have a strong employment history and personal income to support the loan.
- Demonstrate 4–6 trade lines that span 18–24 months.These are just regularly recurring expenses such as rent, electric bills, water bills, cell phones, etc.
We get lots of calls from people, asking how to rebuild credit after bankruptcy. My advice is not to worry that much about your credit score, but to live your life, pay your bills as they come in, and live within your means.
We’ve had former clients tell us they plan to borrow money in the hopes of boosting their credit score. This is probably a bad idea. Debt is something to be used sparingly and on an “as needed” basis. Borrowing money just to establish credit history is a trap. It’s actually giving money in the form of interest to the lender and can actually backfire in the effort to increase credit standing.
If you have lots of accounts in collection or a long history of late payments—understand these can kill your chances of cleaning up your credit to make purchases, regardless of credit score. Bankruptcy will help with, this because it allows you to get the negative history off your reports.
When it comes down to it, do not overly obsess on credit ratings and credit standing. Good credit is usually a result of making financially healthy life decisions…and using credit only when you absolutely need it. Any attempts to game the system usually lead to bad results. Whether you have filed bankruptcy in the past or are just concerned about your credit rating, living within your means is the best way to maintain good credit.
Written By: Greg Gouner
Written By: Greg Gouner