People who file for bankruptcy often remain fearful that their credit score has been ruined forever. Actually, it is not.
Your credit score will no doubt take a significant hit once you file for bankruptcy. However, it will go back up with some time, dedication and the changing of a few financial habits.
People with the best credit see the biggest plunges
No question about it, filing for bankruptcy leads to major damage to your credit history. By far, people with excellent to good credit will see the largest drops in their credit scores.
Here is a breakdown of what happens to credit scores after a bankruptcy filing from consumers with:
- An excellent credit score of 720 or higher: This group will experience the biggest plunge of as much as 200 points.
- A good credit label of 690 to 719: This group may see a more modest credit score drop of 150 points.
- A fair (630 to 689) or poor (629 or below) credit score: This group will not see as big of a drop, mainly because they already are credit risks. In some cases, they may even see an uptick in their credit score but not by much. (In Florida, the average credit card score is 689, according to Equifax.)
Regardless, most people – ranging from those with excellent to poor credit – usually emerge from bankruptcy with a credit score of 550 – one that labels them a credit risk by lenders.
Recovery may come in 18 months
Remember that payment history represents the most critical factor in your credit score. As long as you change certain habits, pay your bills on time and do not use too much of your credit limit, your credit score will improve.
According to a study by the Federal Reserve Bank of Philadelphia, upon a bankruptcy discharge, it usually takes about 18 months for a person’s credit score to return to the same level as it was pre-bankruptcy.