When we explain to our clients why filing bankruptcy may improve your credit score, most of them don't want to believe it. They have heard such doom and gloom statistics about bankruptcy for so long that this statement seems to make no sense. However, we have seen the proof firsthand. Before we explain how this is possible, we'd like to review what makes up your credit score.
Understanding Your Credit Score
Your personal credit score is a number between 300 and 850 that helps banks, mortgage companies, retail lenders, car dealerships, and other creditors assess their level of risk in borrowing to you. The higher the number, the lower the risk. According to Bankrate, up to 90 percent of all lenders consider this number when making their decision. Your performance in the following five categories determines your score:
- Past payment history on all accounts, 35 percent
- Current amounts owed, 30 percent
- Length of credit history, 15 percent
- New credit, 10 percent
- Types of credit used, 10 percent
How Your Score is Affected When You're Struggling with Debt
According to the website 720 Credit Score, most people experiencing overwhelming debt struggle for at least a few years before reaching out for help. In the meantime, several accounts are reported as delinquent and their overall credit score drops. If you have ever tried to climb out of a financial hole, you know how discouraging it is when it only seems to get bigger no matter what you do.
When you file bankruptcy and work diligently at rebuilding your credit, you could have an above average score in as little as two years. Your score does drop initially, but wiping out the debt and starting over is usually the quicker path to financial recovery.
Request a Free Bankruptcy Case Evaluation
If you are considering bankruptcy, we encourage you to contact us for a free evaluation. We will help you determine if you qualify to file bankruptcy, whether it is the best choice for you, and which type offers you the most advantages.