Bankruptcy & FICO Scores

Bankruptcy can erase overwhelming consumer debt and give you the chance to start over and rebuild your credit history. Unfortunately, bankruptcies drop your FICO credit score, and it can take years to regain lost points. Bankruptcy isn't the end, rather it's the beginning of rebuilding your credit score and proving that you're creditworthy.

Causes

A variety of situations can bring on a bankruptcy. Most people file bankruptcy because they're unable to afford their current debts. Maxing out credit cards, losing employment or acquiring a massive amount of medical bills can cause a bankruptcy. Some situations are beyond a person's control, whereas other situations are simply a matter of poor debt and money management. Regardless of the cause of high debts, bankruptcies remove the financial burden and give debtors the opportunity to get rid of outstanding debts.

Consequences

A damaged credit rating is a major consequence of filing bankruptcy. And once there's a drop in credit rating, this creates a snowball effect that affects finance options in the future. Buying a car can result in a higher interest rate or decreased buying power. Some mortgage lenders reject applications if you are applying for a home loan with a fresh bankruptcy. Even worse, bankruptcies affect employment opportunities because some employers -- mostly in the banking and finance industry -- run credit checks, and they prefer candidates with good credit and debt management skills.

Opening New Accounts

Despite the risk of receiving a higher interest rate on credit cards and loans, opening new accounts after a bankruptcy is key to repairing a bad FICO credit score. Fortunately, several creditors and lenders specialize in bad-credit financing and they work with people who have bankruptcies on their credit file. Individuals can apply for a bad-credit credit card, secured credit card -- which requires a security deposit -- or a high-interest personal loan to get back on track and re-establish their credit history.

Paying on Time

Opening a new credit account after a bankruptcy isn't enough to fix a low FICO score. Managing these new accounts responsibly helps build a good score and repair the damage of a bankruptcy. This involves paying monthly bills on time and keeping debts on credit cards to a minimum to avoid repeating past mistakes. Timely payments and the amount owed to creditors account for 35 and 30 percent of credit scoring, respectively.