How do bankruptcies affect your credit score?
Editor's Note
Before starting on a pursuit to accumulate points and miles, it's important to understand how your credit score is calculated and the mistakes you should be careful to avoid. Your credit report follows you around for a long time, and you should only consider opening credit cards if you're able to manage them responsibly.
With every credit card I've opened, I've become even more attentive to paying my bills on time and monitoring my accounts for fraud.
However, it's possible that before you found the world of points and miles, you may have made some mistakes, such as missing payments, carrying a balance or even having to declare bankruptcy.
I'll examine how bankruptcy affects your credit score and what you can do about it.
The contents of this post are not meant to represent legal or financial advice, and you should consult with a lawyer and/or financial professional before making decisions regarding a bankruptcy filing.
Understanding personal bankruptcy
There are two types of bankruptcies an individual can enter into — Chapter 7 and Chapter 13. Chapter 7 is the more traditional of the two, in which all your qualifying debts, such as credit card balances, medical bills and personal loans, are discharged after three to four months.
As soon as you file, an "automatic stay" order stops most creditors from pursuing collection efforts. If you have a high enough income to pay back a certain amount of your debt, you can file for Chapter 13 bankruptcy protection to restructure your debt payments and possibly reduce your debt load as well.
Whether you file under Chapter 7 or Chapter 13, you can expect the bankruptcy to stay on your credit report for seven to 10 years. It is likely to bring down your credit score sharply.
However, Credit Karma says that a completed Chapter 13 bankruptcy could be viewed more favorably in the future, as it indicates that you repaid more of your debt.
How does bankruptcy affect your credit score?
You may be wondering how big of a hit your credit score will take if you file for bankruptcy. There's no one-size-fits-all answer here.
The exact score impact will depend on a number of personal factors, including the amount of debt discharged during your bankruptcy proceedings and the ratio of positive to negative accounts on your report.
However, you can expect to see a drop of 130-200 points on your credit score, according to FICO.
If you file for Chapter 7 bankruptcy, the public record will stay on your credit report for a full 10 years. The good news, however, is that the following items will fall off your report after seven years:
- Trade lines that state "account included in bankruptcy"
- Third-party collection debts, judgments and tax liens discharged through bankruptcy
- Chapter 13 public record items
Most people believe that bankruptcy means their financial life is ruined, and while it should only be considered as a last resort, the impact is limited to only 10 years. If you focus on a clean slate of making sound financial decisions, you'll emerge a decade later with a rejuvenated credit score.
After bankruptcy, you can take proper steps to improve your credit by paying your bills on time, not carrying a balance on any open credit cards and keeping your credit utilization ratio low.
Are you eligible for a credit card after filing for bankruptcy?
A popular misconception about personal bankruptcies is that it is impossible to be approved for a credit card or loan after filing for bankruptcy. After filing for bankruptcy, some people consider secured cards to help them begin the credit recovery process.
Secured cards require you to make a cash deposit up front in exchange for a credit limit. This gives lenders greater peace of mind by protecting them in case you're unable to pay off your card.
Before applying for new credit products to help rebuild your credit, you should examine the factors that led you to bankruptcy in the first place and make sure you're not setting yourself up for failure.
Related: Best secured cards
Bottom line
While bankruptcy will negatively affect your credit report initially, with good financial habits over time, you'll start to see an uptick in your credit score.
In fact, with consistent on-time payments, responsible spending and continual monitoring of your credit report, you'll be on the clear path to rebuilding your credit after bankruptcy.
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- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
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| 4X | Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 4X | Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year. |
| 3X | Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com. |
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$325Recommended Credit
Credit ranges are a variation of FICO® Score 8, one of many types of credit scores lenders may use when considering your credit card application.Excellent to Good
Why We Chose It
There’s a lot to love about the Amex Gold. It’s a fan favorite thanks to its fantastic bonus-earning rates at restaurants worldwide and at U.S. supermarkets. If you’re hitting the skies soon, you’ll also earn bonus Membership Rewards points on travel. Paired with up to $120 in Uber Cash annually (for U.S. Uber rides or Uber Eats orders, card must be added to Uber app and you can redeem with any Amex card), up to $120 in annual dining statement credits to be used with eligible partners, an up to $84 Dunkin’ credit each year at U.S. Dunkin Donuts and an up to $100 Resy credit annually, there’s no reason that foodies shouldn’t add the Amex Gold to their wallet. These benefits alone are worth more than $400, which offsets the $325 annual fee on the Amex Gold card. Enrollment is required for select benefits. (Partner offer)Pros
- 4 points per dollar spent on dining at restaurants worldwide and U.S. supermarkets (on the first $50,000 in purchases per calendar year; then 1 point per dollar spent thereafter and $25,000 in purchases per calendar year; then 1 point per dollar spent thereafter, respectively)
- 3 points per dollar spent on flights booked directly with the airline or with amextravel.com
- Packed with credits foodies will enjoy
- Solid welcome bonus
Cons
- Not as useful for those living outside the U.S.
- Some may have trouble using Uber and other dining credits
- You may be eligible for as high as 100,000 Membership Rewards® Points after you spend $6,000 in eligible purchases on your new Card in your first 6 months of Card Membership. Welcome offers vary and you may not be eligible for an offer. Apply to know if you’re approved and find out your exact welcome offer amount – all with no credit score impact. If you’re approved and choose to accept the Card, your score may be impacted.
- Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
- Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com.
- Earn 1X Membership Rewards® point per dollar spent on all other eligible purchases.
- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and get $10 in Uber Cash each month to use on orders and rides in the U.S. when you select an American Express Card for your transaction. That’s up to $120 Uber Cash annually. Plus, after using your Uber Cash, use your Card to earn 4X Membership Rewards® points for Uber Eats purchases made with restaurants or U.S. supermarkets. Point caps and terms apply.
- $84 Dunkin' Credit: With the $84 Dunkin' Credit, you can earn up to $7 in monthly statement credits after you enroll and pay with the American Express® Gold Card at U.S. Dunkin' locations. Enrollment is required to receive this benefit.
- $100 Resy Credit: Get up to $100 in statement credits each calendar year after you pay with the American Express® Gold Card to dine at U.S. Resy restaurants or make other eligible Resy purchases. That's up to $50 in statement credits semi-annually. Enrollment required.
- $120 Dining Credit: Satisfy your cravings, sweet or savory, with the $120 Dining Credit. Earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, and Five Guys. Enrollment required.
- Explore over 1,000 upscale hotels worldwide with The Hotel Collection and receive a $100 credit towards eligible charges* with every booking of two nights or more through AmexTravel.com. *Eligible charges vary by property.
- No Foreign Transaction Fees.
- Annual Fee is $325.
- Terms Apply.