Having a lot of unpaid debt can be an overwhelming experience. If your debts exceed your assets, filing bankruptcy could be an option. Although declaring bankruptcy may give you some financial relief, this relief generally comes with certain consequences. This includes damaged credit that will impact the interest rate you pay on loans and credit cards in the future.
Bankruptcy and Credit
Your credit score is based on the data found in your credit report. A bankruptcy is a very derogatory item to have on your report, and it will negatively affect your credit. For example, FICO credit scores range from 300 to 850. The higher your score, the better a lender will consider your credit to be. A bankruptcy can drop your FICO credit score anywhere from 130 to 240 points, according to the Fair Isaac Corp. How much your score falls depends on the other data in your report. What credit score you have influences the interest rate you'll receive on credit products.
Credit Card Interest Rates
Generally, the higher your credit score, the lower the interest rate you'll receive on a credit card. Special financing offers, such as zero percent interest, are generally reserved for consumers with credit scores well into the 700s, according to financial website Bankrate.com. If you have a bankruptcy on your report, your credit score will be lower, and the lower it is, the higher the interest rate you may receive. If you have subprime credit, which is a credit score below 660, there are credit issuers that may give you a credit card but with a high rate. For example, First Premier issues its platinum credit card to consumers with poor credit, but it comes with a 36 percent interest rate as of publication.
Loan Interest Rates
How high or low your credit score is will impact any loans that you apply for. According to myFICO, as of November 2012, a credit score of 720 to 850 may get you a 3.465 percent interest rate on a 36-month auto loan. But if your score is 500 to 589, that same auto loan may come with a 17.031 percent interest rate instead. The same is true when it comes to mortgage loans. For example, if you have a FICO credit score of 720 or above, a lender may offer you a 30-year fixed rate mortgage at 2.981 percent. Drop the score to between 620 to 639, and the interest rate shoots up to 4.570 percent. The higher the rate, the more you'll pay in interest charges over the life of the loan.
A bankruptcy is a public record, and it will remain on your credit report for up to 10 years. The bankruptcy will continue to affect your credit for as long as it appears on the report. However, the more time passes, the less of an impact it will have on your score, according to the website myFICO. Plus, if you use your credit wisely following a bankruptcy, such as making payments in a prompt manner and keeping credit card balances low, your credit score will gradually improve over time.
- myFICO.com: Credit Basics
- AutoLoanDaily.com: FICO Reveals How Mistakes Can Drop Your Credit Score
- Bankrate.com: 5 Tips If You're Tempted By a 0% Credit Card
- Time: Yikes! The Rise of Subprime Credit Cards
- CNNMoney: First Premier's $400-a-Year Credit Card
- myFICO.com: Your FICO Score is an Important Factor In Your Auto Loan.
- myFICO.com: FICO Scores Could Save You Thousands of Dollars Each Year on Your Mortgage.
- myFICO.com: How Can I Minimize the Negative Effect of a Bankruptcy?
Mack Mitzsheva is a tax lawyer, personal finance expert and the author of the forthcoming ebook, "10 Best Places to Work Online." Mitzsheva is also a social media entrepreneur with five successful sites under her belt. Always innovative, Mitzsheva is currently developing a cutting-edge budgeting app for newlyweds.