How Does Bankruptcy Affect Credit Score?

Keep a clean credit history, and your credit score will rise after bankruptcy. Getty Images

After emerging from a bankruptcy case, most people will profess to having no intention of getting into debt again. They certainly don't want to repeat mistakes or go through the trauma and the drama that often leads an individual to file the first time. Hopefully, for those who had to file in order to discharge burdensome credit card debt, they've learned better financial management through credit counseling and debtor education.

Controlling spending and avoiding unnecessary credit card debt are certainly laudable goals. Still, even if a debtor believes that he or she will have no need for credit in the future, most people who file bankruptcy are concerned with how that process will affect their credit score. It's a legitimate concern.

How a bankruptcy affects your credit score depends on many factors, but the most important may be whether you had a decent credit score before you filed bankruptcy or whether your credit score was marginal or poor.

FICO Scores

One of the leading purveyors of the credit score is a company called Fair Isaac. Scores calculated using formulas and algorithms developed by the Fair Isaac Company are called FICO scores. Fair Isaac’s formula is proprietary, meaning that Fair Isaac owns the process and doesn’t have to provide that formula to anyone. Because of this, sometimes it is difficult to explain or predict how the company calculates any particular credit score.

FICO credit scores range from as low as 300 to as high as 850. Most lending banks consider a credit score of 720 to be good.

The Fair Isaac Company uses the information contained in your credit report as the raw material for calculating the score. The three main credit reporting agencies, Equifax, Trans Union and Experian, may not have the same information, and therefore, your credit score could differ from one agency to another.

Usually, this difference is not more than a few points.

For Fair Isaac to calculate a credit score at all, you must have at least one account that has been open six months or longer, and at least one account that has been reported to the credit bureau within the last six months.

Fair Isaac uses various pieces of credit information, both negative and positive, to calculate your score. According to the company’s own materials, here are the percentages that each type of information contributes to the overall score:

  • Payment History:        35%
  • Amounts Owed:        30%
  • Length of Credit History:    15%
  • New Credit:            10%
  • Types of Credit In Use:    10%

To learn more about what goes into determining your credit score, see How My FICO Scores Are Calculate.

Other companies also market and provide credit scores based on their own calculations, which may differ from the ones used by Fair Isaac.

How Does Bankruptcy Affect Your Credit Score?

Most types of negative information in your credit report will affect your credit score. If you have been slow to pay or you have skipped payments, your score will reflect that. Carrying a large amount of debt compared with the limit on those accounts can also be an issue.

Before reaching the point where you file bankruptcy, you probably found it difficult to pay regularly on your accounts. You might have maxed out most or all of your credit cards. Either circumstance will negatively affect the credit score.

If your credit score was relatively low, say in the 500s, before you file bankruptcy, the score will take a hit, but it probably will not have much of an effect.

On the other hand, if the debt load was not very high, it is possible that the bankruptcy could have little impact at all on the credit score.

The people who are more likely to see a hit to their credit scare are those lucky few who enjoyed a decent credit score before filing bankruptcy.  This can happen when people struggle but are able to make payments until the case is filed. A bankruptcy case is likely to significantly affect the score.

The bottom line for many, however, is not the effect the bankruptcy will have on the credit score. It's the effect that filing bankruptcy will have on credit decisions in the future. Even without a credit score, the fact that bankruptcy appears on the credit report at all will drive many credit decisions for as long as the filing appears, which can be for as long as ten years. 

Next, learn why your credit score is important even after bankruptcy, and the steps you can take to improve your credit score.   

How to Improve Your Credit Score After Bankruptcy

Is Your Credit Score Important After Bankruptcy?