When you apply for new credit lenders will review your consumer credit report and use the information to establish your credit worthyness. An underwriter will consider both your credit score, your debt to income ratio and any other information reported from your credit profile. Your debt to income ratio can be calculated by dividing your monthly net income by the total of your minimum monthly debt payments.
Credit Score Calculation
In order of importance, your credit score is composed of six main parts:
1. Payment History - Be sure to pay on time.
2. Negative Items - Collections and Past Due.
3. Available vs. Used Credit - The percentage of available credit used.
4. Age of Credit History - Average age of your accounts.
5. Number and Types of Accounts - The diversity of your credit profile.
6. Recent Inquires - Running your credit for the purposes of borrowing.
To aggressively improve your credit score, pay your bills on time and keep your revolving credit balances below 20% of your credit limits.
The diversity and age of your accounts are also factored into your consumer credit score, however the types of credit (mortgages, vehicle financing, etc.) on your report are specific to your borrowing needs and reflect your specific financial circumstances.
Your bankruptcy filing gets reported in the public records section of your credit report, however it does not directly impact your credit score. Active creditors at the time of your filing must begin to report the debt as subject to bankruptcy and preventing a continued decline in your credit score.
A credit item status of 'included in bankruptcy' is reported once per credit item stopping any 'past-due' statuses that negatively impact your score.
The key benefit to bankruptcy on borrowing is improving your debt to income ratio. By removing bad debt like; high interest credit cards, unwanted medical bills, back taxes, and past due utilities. Your new and improved post-bankruptcy monthly budget should allow for significant savings and positive income to borrow against.
In less than three months after filing for bankruptcy, you will be eligible to apply for new credit. A pre-paid credit card, (where you pay up front) is a very good place to start because there is very little risk to the lender. Your payment each month, re-fills your available credit that you borrow against with each purchase.
After only a few years you can again qualify for a new home loan. The current FHA guidelines for post bankruptcy home loans can be found here. (opens a new window)
Full Service Law Firm
Our Massachusetts bankruptcy lawyers assists each of our clients with analyzing, managing and improving their credit report and score. There are numerous strategies we employ before and after bankruptcy to maximize your credit improvement. Our team has the experience you need to improve your credit score through bankruptcy.