Feeling good about your credit score? A new scoring model could change that, but probably not drastically. FICO announced today that it’s rolling out FICO 10, the latest version of its scoring model used by lenders to calculate your credit score.Read more...
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A bankruptcy will stay on your credit report for 7 to 10 years, but there are ways to rebuild your credit
A Chapter 13 bankruptcy can stay on your credit report for up to seven years,...A Chapter 13 bankruptcy can stay on your credit report for up to seven years, while a Chapter 7 bankruptcy can remain for a maximum of 10 years. Credit scores can drop by 100 points or more after bankruptcy is added to a credit report. To rebuild your credit score after bankruptcy, you'll want to continue making on-time payments to your non-bankruptcy accounts and may want to consider obtaining a secured credit card. Get your free credit score with Credit Karma » If you're feeling overwhelmed by your debts, bankruptcy is a legal process that can help you find relief. Filing for bankruptcy could stop a foreclosure or car repossession, protect your wages from garnishment, or keep your utilities from being turned off. But bankruptcy also has its fair share of disadvantages. First, navigating a bankruptcy will typically require the help of an attorney, which can be expensive. Second, your credit score will take a hit after bankruptcy. And damaged credit can make it more difficult to get approved for a line of credit in the future, especially credit with attractive rates and terms. But the good news is that a bankruptcy won't hurt your credit score forever. Eventually, the bankruptcy will fall off your credit report and will have zero future impact on your score. Here's how long it takes for that to happen. How long does bankruptcy stay on your credit report? Bankruptcy typically stays on your credit report for a minimum of seven years and a maximum of 10 years. While there are many types of bankruptcy, two of the most common types are Chapter 7 and Chapter 13. With Chapter 7 bankruptcy, all eligible debts are discharged immediately. With Chapter 13 bankruptcy, you agree to a three- to five-year repayment plan to partially or fully repay your debts. A Chapter 13 bankruptcy can stay on your credit report for up to seven years. A Chapter 7 bankruptcy can stay on your credit report for up to 10 years. It's important to point out that each delinquent account included in the bankruptcy will also remain on your credit report up to seven years. But the seven-year clock for delinquent accounts begins when they were first reported as late, not when you filed for bankruptcy. So if some of the accounts included in your bankruptcy were already delinquent before you filed, they will fall off your credit report before the bankruptcy does. Any accounts that were current until you filed, however, will be removed from your report at the same time as the bankruptcy. How does bankruptcy affect your credit score? Unfortunately, bankruptcy is considered a seriously negative event by scoring models like FICO and VantageScore. As such, if a bankruptcy is added to your credit report, it can have a severe negative impact on your credit score. According to myFICO, someone with a score in the mid-600s or 700s could expect their score to fall by 100 points or more — even 200+. Also, the more accounts that are included in your bankruptcy, the heavier an impact it's likely to have on your score. Thankfully, the negative impact of a bankruptcy on your credit report will diminish over time. So even though a bankruptcy will still be on your credit report five years down the road, its impact on your score will be much less than it was in the year that you filed. Can you remove a bankruptcy from your credit report? Unfortunately, if a bankruptcy that's appearing on your credit report is legitimate and is being reported accurately, it's highly unlikely that a creditor or credit bureau would agree to remove it. Credit repair companies don't have any special powers to make this happen either. So don't allow yourself to be scammed into paying an upfront fee to a company that says it can remove legitimate negative items from your reports. However, you'll want to check your credit report to make sure that the right accounts were reported as being involved in the bankruptcy. You'll also want to make sure that all the accounts that were part of the bankruptcy are showing a balance of zero. If accounts that weren't part of the bankruptcy are being reported as included, you can dispute the errors to have them removed. Or if included accounts are still showing an outstanding balance, you can dispute this as well. How can you rebuild your credit after bankruptcy? While your credit score will take a hit after bankruptcy, there are steps that you can take to begin building a positive credit history again. First, if there are any credit accounts that weren't included in your bankruptcy, make sure that you continue to make on-time payments on them each month. Second, applying for a secured credit card can be one of your best options for rebuilding your score. Since these cards require a security deposit, which limits the issuer's risk, they're easier to qualify for with poor or damaged credit. Payment history on secured cards is reported to the credit bureaus just like regular credit cards. So making consistent on-time payments on a secured card can improve your score over time which can open up more credit opportunities for you down the road. Before you apply for a secured card, check to make sure that it reports cardholder payment activity to all three major credit bureaus. And to see the biggest positive impact on your score, try to keep the credit utilization rate on your secured card below 30%. Final thoughts Remember, bankruptcy is just one of various debt relief options. Depending on your situation, you may want to explore other options first, like taking out a debt consolidation loan or trying to work out a repayment plan with your creditor on your own or with the help of a credit counselor. If you're looking for advice on how best to manage your debts, you may want to consider setting up an appointment with a NFCC-certified credit counselor. In some cases, you may find that a different debt relief strategy would save you money while also having less of a negative impact on your credit score. But if you do decide to file for bankruptcy (or already have), know that the damage to your credit score will be temporary. Ultimately, the biggest cure to your bankruptcy-related credit score ailments will be time. If you're patient and commit to following good credit habits, your credit score will slowly but surely rise. 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My credit score dropped 11 points when I bought a house, but I'm confident the mortgage will actually boost my credit in the long run
After closing on a mortgage to buy a house, my score dropped by 11 points,...After closing on a mortgage to buy a house, my score dropped by 11 points, but I'm not too worried, because I understand why my score dropped and how a home loan could actually improve my credit in the long run. Before approving me for my mortgage, my lender did two hard pulls on my credit, which lowered my credit score by about two points each time. My home loan also increases my total debt, which increased my credit utilization ratio. This ratio accounts for 30% of my FICO score, and a lower credit utilization is better. As long as I make on-time payments on my mortgage, my credit score could actually get even higher in the long run. Having a mortgage also improves my credit mix, which can positively impact my score. Personal Finance Insider's email newsletter is coming soon! Sign up here » During the two years I spent preparing to buy a house, aside from saving up money towards my down payment, I also knew that I had to start babying my credit score. I made a point of making all my payments on time and paying my balances off in full every month. Plus, I made sure to avoid applying for any new credit cards or line increases. In the end, my hard work paid off. When I applied for my mortgage, I had my highest credit score ever and I was able to use it to secure an affordable interest rate on my loan. What I wasn't quite prepared for was the fact that my score would drop after closing on my new home, just as I had gotten used to having great credit. Despite the fact that my score has taken a dip, I'm not too worried. In fact, I think taking on additional debt in the form of a home loan will actually help improve my score in the long term. Here's a closer look at why I'm betting I'll ultimately see my score go up. How credit scores are determined Before getting into specifics, it's important to understand how credit scores are determined. The reality is that your score with each of the credit bureaus is based on a mix of factors that each account for a different percentage of the number you're given. This is how your FICO score breaks down: Payment history (35%): Whether or not you have a history of making your payments on time has the greatest impact on your overall score. To that end, it's crucial to make sure that you pay your credit card bill on time, every time. Credit utilization rate (30%): Your credit utilization ratio looks at what percentage of your total available credit you've used. For the best results, you should try to keep this ratio under 30% whenever possible. Length of credit history (15%): While you can't really do much to speed this one up, the longer your accounts have been open and you have a history of making timely payments, the higher your score will be. Credit mix (10%): Credit scores take into account the total amount of outstanding debt that you have, as well as the different types of credit that you use. Your FICO score tends to favor having a variety of loan types on your credit report, including installment loans and revolving credit. Recent applications (10%): Every time you apply for a loan, the lender does what's known as a "hard pull" on your report in order to check your credit score. Each pull will ding your score by a few points and stay on your report for about two years. Having too many pulls on your report at one time can also hurt your score. Why my score took a temporary hit Throughout the process of buying a house, my score dropped 11 points in total. However, given the above information, it honestly makes sense that it took a dip. In applying for and eventually receiving my mortgage, several things happened that impacted my score, including: New hard pulls on my credit: My lender pulled my credit twice during the application process, once when I initially applied for the loan and once right before the loan was issued to ensure that nothing had substantially changed. Each time there was a credit pull, my score dropped about two points. New open account: Opening a new account can also negatively impact your score in the short term. In this case, it did because it added to my overall debt. Before getting a mortgage, I only had a few thousand dollars' worth of student loans left to my name. Now, I also owe hundreds of thousands of dollars in housing debts. Why I'm betting I'll have an even better score in the future Ultimately, though, I'm guessing that the drop in my score will only be temporary. In fact, I have reason to believe that, over time, taking on more debt in the form of a mortgage will actually make my score higher than it was when I was approved for my loan. It all comes down to the following factors: Updated payment history: According to Experian, the dip in scores from opening new accounts is only temporary. It advises that as long as I continue to make timely payments on my new account, my score should rebound shortly. Lowered amount of total debt: As I continue to make payments toward my mortgage, the total amount of debt that I have to my name will go down, which will help my credit utilization ratio. Better credit mix: By adding a new installment loan to my credit report, I am diversifying. Before I got a mortgage, the bulk of my profile was made up of revolving credit or credit cards. Now, the distribution is more even. 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That’s an improvement over the normal once-a-year limit. While it won’t fix potential credit woes, it...That’s an improvement over the normal once-a-year limit. While it won’t fix potential credit woes, it can be a helpful tool to stay on top of your finances.