Is Your Credit Score Ruined by Filing Bankruptcy?

11 May Is Your Credit Score Ruined by Filing Bankruptcy?

Not really. The greatest effect on your Credit Score (Fico score) Is the number of late payments on your accounts. More late payments – worse scores. Certainly there are other factors, and filing bankruptcy may have the immediate effect of lowering the score.

But why do you care? That’s the truly important question.

First of all, if you have months of missing credit card or house payments, your credit score is none too good at the moment. Filing bankruptcy won’t hurt it that much. And it will give you a fresh start – a clean slate to build your credit back from where it is and in far less time than it takes struggling to pay off those credit cards.

Secondly, and most importantly, let’s look at the advantages of having good credit. What will it do for you? Well, you can qualify to buy a new home. But you still have to prove you can make the payments on that home and that is far more important to lenders than your credit score.

And with a good score, you will be able to qualify for the deals on television to buy a car with nothing down or a terrific interest rate. Wow, a great thing! But what does it really mean? Let’s suppose you want to buy and finance a $30,000 automobile. Even with bad credit score the car company will probably still sell you the vehicle; they’ll just charge you two or three times the interest rate of someone with good credit.

So, let’s look an example. If the special interest rate for “good credit” is 3%, then on a $30,000 loan spread over 5 years, you will pay $2343.64 in interest. If you don’t qualify for that rate and end up at 7% interest you’ll pay $5642.16 in interest. Thus, having good credit will save you $3299 over five years.

When you compare that savings to the credit card and other debts going away by filing bankruptcy, having bad credit for a couple of years is clearly the better of the two!

 

photo credit: Devonyu

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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