A chapter 7 bankruptcy stays on your credit report for 10 long years, while a chapter 13 falls off in seven years, but the credit score damage should diminish over time. Here’s how you can maintain a good credit score after a bankruptcy falls off your credit report.
Dear Keeping Score,My bankruptcy fell off my report in 2018. Currently, I have excellent credit shifting in the 797 to 811 zone. I currently have two credit cards, one of which I use regularly for the cash back benefit and pay off several times a month. Now that my bankruptcy is gone, I’m wondering if I should get a lower-interest card.
What’s the deal with closing cards down? Would I keep my two current cards active if I did apply for a third, more attractive card? It’s all so confusing. My credit dropped 7 points last week because I was “using” 2% of my available credit even though I am basically always paying it off. Looking to set up my financial picture in the way I would have had I never had to file. Thank you! – Tamra
Congratulations on your successful recovery from bankruptcy. Yours is a success story that others would do well to emulate.
Bankruptcy exists in this country for good reasons, but I have always considered it as a last-resort option – again, for good reasons. It certainly offers benefits in the form of ending collection harassment, getting a fresh start and from the financial education filers receive as part of the counseling requirement. These are the pluses.
But in my experience, it has the personal impact of a major life failure and carries a number of major negative consequences. I deal extensively with how to decide if a bankruptcy is right for you and how to best recover from one in my book, “Credit Repair Kit For Dummies.” Since we are all about credit scores here at Keeping Score, one of the top reasons to avoid bankruptcy if at all possible is the toll it takes on a person’s score and the length of time it takes to recover.
Unlike other options for handling debt (that generally drop off a credit report after seven years), most bankruptcies stay on credit reports for 10 years. I say most because there is more one type of bankruptcy filing available.
Chapter 7 bankruptcy is what most people think of, but there is also a Chapter 13 filing (sometimes referred to as a wage earner filing) plus some other commercial and municipal chapters. In a nutshell, a Chapter 7 filing wipes out most, but not all of your debts (IRS and student loan debts may survive in a Chapter 7) and you don’t repay anyone anything.
A Chapter 13 bankruptcy requires you to repay a portion of what you owe over time based on your income and debt load. People who don’t qualify for a Chapter 7 may be forced into a Chapter 13. A Chapter 7 stays on your credit report for 10 long years, while a Chapter 13 falls off in seven years.
See related: 14 key factors when considering bankruptcy
How bankruptcy affects your credit score
In addition, mainstream lenders take a more critical view of a bankruptcy than they will of, say, a history of late payments.
Payment history is the most important factor when it comes to your credit score, but if you can get back on track (and stay there) after catching up on few late payments, the impact to your score will begin to decrease relatively quickly.
This is not the case when it comes to bankruptcy. Most will find that their scores have dropped into the high 500s or low 600s and take much longer to recover. In addition, borrowing money becomes more costly (if possible at all), insurance rates may increase and employers may have an issue hiring or promoting you when they see a bankruptcy on your credit report.
However, you have clearly turned the corner and all the impacts of your bankruptcy are now gone. For those of my readers still recovering from a bankruptcy, credit rebuilding can begin almost at once by adding positive data to your credit report from a secured credit card (backed by a cash deposit) or adding a low limit retail store card after a few months.
Your score is in the “excellent” range. I have said before and will say it again – don’t bother chasing a perfect score. The higher you go, the more difficult it is to stay at the scoring pinnacle. Your seven-point drop is not unusual and is no cause for concern.
As you add a balance or make a payment over your billing cycle, expect that your score will bounce up and down a little. At your scoring level, a few points either way make no practical difference. Excellent is excellent, whether it is 790 or 850. Remember, these are snapshots at that particular date and time.
FICO 10T, which is expected to roll out this fall, will look at trends in balances not just snapshots. That will probably help stabilize or even raise your score.
See related: Do tax liens affect your credit score?
Card options after bankruptcy falls off your credit report
As for getting another card at a lower rate, I see no reason why you shouldn’t explore your options. But I would caution against closing any account unless it’s a card that charges an annual fee that you feel is unreasonable for the benefits you get from the card. Length of credit history is a scoring factor worth 15% of your score, and long-standing accounts help you score the max in this category.
You mention using at least one of your cards for the cash back benefit, which is great. But I strongly advise you to make it a goal to always pay your cards off each month. That way you can reap the benefit without incurring any interest.
The best way to never carry a balance over to the next month is to stop living paycheck-to-paycheck by establishing an emergency savings account. I recommend six months (at a minimum) to a year of living expenses. That way you can be your own banker if you outspend your income for an occasional purchase.
I think it is very appropriate to add an additional card or two if you like. At a minimum, they will add to your overall credit limit and lower your utilization rate, which accounts for 30% of your score. You may want to look for a card that offers benefits you don’t currently have or a type of card you don’t currently have. For example, if you have a Visa and Mastercard, consider a Discover or American Express card, again with the assumption that you will not be carrying a balance.
One way to handle this would be to designate which cards you will use for which purchases. For instance, I use one card for meals, one for travel and a third for business-related expenses.
Remember, you don’t need to carry a balance or even use all your cards to build and keep a great score. Just keep paying your cards on time, as agreed and only take on new credit when you need it and you’ll keep your credit in the scoring range you want.
Remember to keep track of your score!