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Credit Scores, Credit Woes, and Credit Raises

Debtors often judge themselves by their credit score. In a sense, credit scores do just that: they provide creditors a standardized review mechanism to gauge the credit worthiness of a debtor. As is often recognized, a debtor with a low credit score is a risky investment for a bank or other lender. Conversely, the debtor with a high credit score is not risky at all. What is risk? Simply stated, risk translates into interest rates. The higher the credit score, the lower the risk and thus a lower a interest rate; conversely, the lower the credit score, higher the risk and thus, a higher interest rate.

For many debtors exploring debt negotiation or even bankruptcy, their credit score is either low or headed that direction. Most debtors have no idea what is causing their credit score to fall. The answer is quite simple: your credit score is derived from the status of your credit accounts. Unfortunately, many debtors have no idea how many credit accounts they may have nor the status thereof. This is quite silly because everyone is entitled to a free copy of your credit report once every 12 months from each of the three nationwide consumer credit reporting agencies: Equifax, Experian, and TransUnion. The credit reporting agencies accreted a central source to provide free credit reports to consumers and is quite easy to access via the website: www.annualcreditreport.com or via telephone at 877 – 322 – 8228. In some instances, the debtor can greatly increase their personal knowledge of their own finances by downloading a copy of their credit report in a matter of minutes.

Once a credit report is downloaded, a debtor may find that he or she has a number of delinquent accounts. Each month that account remains in default results in a further lowering of a debtor’s credit score. The low credit score will be an obstacle for the debtor in the future to get financing for a car or house. For some debtors, their credit score has been descending quite some time in their credit accounts and have gone into default with interest rates ballooning up to nearly 30%. In cases like this, it may be essential for the debtor to look toward bankruptcy as a means to stop the bleeding. By filing bankruptcy, a line is drawn in the sand as to the descending credit score. From the very day that the debtor files bankruptcy, that descent stops, reverses, and starts to head upward. The debtor who files bankruptcy often has a misconception: they may feel that they are filing bankruptcy for the present day in order to relieve themselves of lawsuits, creditor phone calls, and other harassments. But in fact, they are really filing bankruptcy for two or three years from that point. In two or three years, many debtors find that their credit scores have risen significantly since filing bankruptcy and in some instances have even returned to their pre-bankruptcy numbers.

But not every debtor is created the same. Some debtors have several credit accounts that they will carry through bankruptcy and can continue to pay even after bankruptcy, such as car payments, that will allow their credit scores to increase assuming there is no future default. Other debtors, however, may not have such luxuries and in these instances, the debtor must work hard to increase their credit score, in some instances by getting a credit card after filing bankruptcy and having a flawless payment history for the several years afterwards.

As for buying a home, the governmental mortgage companies (Fannie Mae and Freddie Mac) currently require a three-year hiatus from filing bankruptcy before they will authorize a loan. But for many debtors, this waiting period is a blessing in disguise because it allows them to rebuild their credit, save for a down payment, and even get a job or a better job.

It should be noted, that bankruptcy stays on your credit report up to 10 years from the date the bankruptcy is discharged. And it should be noted that your credit score will go down upon the filing of the bankruptcy, though it is impossible to forecast the drop. Everybody is different and everybody starts out with a different credit score. If your credit score is low to start with, the impact of filing bankruptcy will be fairly nominal. Conversely if you have a relatively high credit score when you file bankruptcy, the drop may be significant, maybe several hundred points. With good financial management, it is possible to reestablish credit improve your credit score within just a few years.

The experienced attorneys at Arnold & Smith, PLLC can assist you in these matters and in other debt issues you may have and we invite you to contact us at your earliest convenience.