Understanding Your Credit Score
Understanding and Rebuilding Your Credit Score After Bankruptcy
A strong credit score is essential for your financial future, especially after filing for bankruptcy or dealing with debt. Understanding the factors that determine your score is the first step toward improving it. Here is a breakdown of what makes up your credit history:
What Makes Up a Credit Score? The Key Factors
- Payment history (The most important factor)
- Amounts owed (Credit utilization ratio)
- Length of credit history
- Type of credit used
- Derogatory remarks (Collections, bankruptcy, etc.)
Your Payment history and derogatory remarks (collections, bankruptcy, judgments, etc.) comprise the greatest percentage of your score. Focusing on these two areas provides the fastest path to rebuilding credit.
What Does My Credit Score Number Mean?
Creditors reference scores from four main sources: Equifax, Experian, TransUnion, and FICO. While the three major credit bureaus are often checked by lenders, FICO scores have a higher standard and may show a lower score. Mortgages, auto loans, and certain financial products often rely on a FICO score check.
Your score helps lenders gauge your credit risk. Here’s how the three credit reporting agencies typically rate your credit:
| Rating | Score Range |
|---|---|
| Exceptional | 800–850 |
| Very Good | 740–799 |
| Good | 670–739 |
| Fair | 580–669 |
| Poor | 300–579 |
If you’d like to get a FREE copy of your credit report, check out the Annual Credit Report website.
Payment History: The Key to Improving Your Credit
This is the simplest factor: On-time payments positively affect your score, while late payments, even just one day, are enough to drop it significantly.
The best way to guarantee on-time payments is to set up auto-pay with your bank or creditor that sends the minimum (or full) amount due each month. Consistency is rewarded when rebuilding your credit score.
Credit Utilization: Managing Amounts Owed
Generally, it’s best to keep your credit card debt to 30% or lower of your credit limit. However, if you are actively trying to rebuild credit after bankruptcy, it’s best to keep the debt to just 10% or less.
You can see how the total amount of credit available is linked to your total credit debt. For example, on a $1,000 credit limit, keeping debt to 10% means keeping a running balance of just $100. If you have a limit of $20,000, you’re able to keep a running balance of $2,000 without it having a negative effect on your credit score.
When rebuilding credit after a bankruptcy, treat any new credit cards like cash. Paying off purchases immediately ensures you stay on track and helps your credit score rise faster by keeping utilization low.
Soft Hits & Hard Hits: Inquiries Explained
Credit “hits” or inquiries occur when a lender runs your credit report to determine eligibility for a loan or credit card.
Pre-approval is most often a soft hit. Soft hits do not affect your credit score and are used by the creditor to partially determine your eligibility.
Hard hits will result in a loss of a few points and typically stay on your report as inquiries for 6 months to a year. Hard hits are done when you are ready to sign on the dotted line for a loan. It’s always a good idea to ask a lender whether running your credit report will result in a soft hit or a hard hit.
Length of Credit History
Simply put, the longer your credit history, the better your score tends to be. This is largely out of your control when actively trying to rebuild credit. However, the good news is that your history cannot be taken away and just gets better with time and responsible use.
