The credit bureaus track a variety of information about your banking as it relates to borrowing and keep a file which notes various risk factors. They provide this information to possible lenders so that they can decide if you are a safe bet to pay back their money. While your bankruptcy will wipe out all the overdue/non-payment notices, the fact that you declared bankruptcy will show up on your credit score for a number of years (in Canada, 6 – 8 years depending on the credit bureau).
Although credit bureaus keep their exact point building system guarded, the following list gives a solid estimate of how scores are weighted:
Payment history (about 35% of your credit score)
Your payment history is the single largest factor that builds your credit score. After bankruptcy, you no longer have a history of payments. This is a great opportunity to make sure that you pay all your bills, such as utilities, rent, a pre-existing mortgage or car lease/loan, etc. on time.
Current debt load (about 30% of your credit score)
Although you have to surrender all credit cards during bankruptcy and will not be approved for an unsecured credit card for some time afterwards, you can get a secured credit card. Use this card and pay if down fully each month. Keep your card balance below 30% of the card’s limit to help build up your credit score.
Age of Accounts (about 15% of your credit score)
After bankruptcy, you are at a real disadvantage in this area of credit scoring because you have lost your credit history. Get a secured credit card through your bank (even if it is only for $500) as soon as you can.
Type of Credit (about 10% of your credit score)
Again, after bankruptcy you will not initially have credit (except possibly in secured loans such as mortgages and car leases) but the type and amount of credit you build up--such as installment, revolving, and consumer finance--will impact your score. Consumer financing debt (department, electronic, furniture stores, etc.) will have a more negative impact on your account than a bank loan or conventional credit card.
Applying for Credit (about 10% of your credit score)
Every time someone asks for your credit rating, your credit score goes down an average of five points. So shopping around for a car lease or mortgage can bring your score down. Before you apply for credit after bankruptcy, do some homework and research. Be realistic about the type of credit you can get and minimize the number of applications you have to make by only applying for loans that you have a good chance of success in getting.
As you begin to have access to credit, make sure that you stay on top of all your bills. It is better for your credit score to make the minimum payment on all your credit loans, rather than letting a few smaller balances go past due for a month or two.
“Don’t let your past decide your future.” Frederick Bliss
Many people think that they will not be able to get credit after bankruptcy. This is not true; you will be able to borrow money after bankruptcy. It will just be more difficult than if you had a good credit rating. Your credit rating can actually get better following a bankruptcy, providing you follow a few practical steps. Once your bankruptcy is discharged, you can pay bills on time and build up cash reserves and take other actions that will rebuild your credit score.
You may even be thinking that you never want to go into debt again because of the stress that led up to the bankruptcy. Going into debt is a different kettle of fish than having access to credit. Most people require a mortgage to buy a home. If you want a newer car, you will probably need to use a loan or lease to afford it. If you need to book a flight or make a reservation, it is difficult to do so without the use of a credit card. Debt becomes a problem when you start using credit to make purchases that don’t fit your income level. But not having access to credit can make living in the modern world difficult.
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