When an individual accumulates debt, he or she wants to get rid of it. Whether it is a large sum or not, getting rid of debt allows for financial burdens to be uplifted. However, not everyone is able to quickly pay off debt. In some cases, debt gets so overwhelming that the only options is to initiate a debt relief options, such as filing for bankruptcy. While some hold back on filing simply because they are fearful of what it will do to their credit score; however, it is important to note how it is possible to rebuild one’s credit while also getting a fresh financial start.
How bankruptcy impacts a credit score
A person’s credit score can be a very import number, as it can indicate a person’s ability to obtain credit cards, car loans, mortgages and what interest rate they will get if approved for any of these. Thus, maintaining a high credit score is often one’s objective. Because filing for bankruptcy could reduce an individual’s credit score by 200 points, many want to avoid this.
However, it should be noted how other actions, or rather inactions, impact one’s credit score. A missed credit card payment could cause a drop in 100 points, depending on how late it is. The same fate could occur if a car loan payment is 60 days past due. If a mortgage is missed for 60 days, this could result in a drop in 120 points.
Additionally, if a house is foreclosed on, this could result in a drop in 125 points. And when bills get sent to collections, this could cause a drop in 150 points. Thus, the damage to one’s credit score could be much more severe if they continue to struggle financially rather than file for bankruptcy when it first becomes unmanageable.
Improving your credit score
After filing for bankruptcy, it can take up to 6 years for one’s credit score to fully recover. In contrast, a missed payment can take 18 months and maxing out a credit card can take 3 months. The best way to ensure your credit score will not take another hit is to implement good financial habits. This include paying bills on time, paying off balances, not applying for more credit cards and even being added as an authorized user on a relative’s credit card that makes payments on time.
When debt causes one to take a hit on their credit score, the last thing they want to do is harm it even further. While filing for bankruptcy might mean that an individual’s credit score may go down, the reality is that missed payments, being sent to collection or having a house foreclosed causes a much bigger hit. Thus, it is important to timely understand the debt relief options available, helping one determine if bankruptcy is the best step to take.