How Bankruptcy Affects your credit (FICO) score

Making the decision to file bankruptcy should not be taken lightly. They call it the 10-year mistake because it will take that long for your financial life to return to normalcy. How “normal” is determined by your credit or FICO score. Every time you take out a credit car, car loan, mortgage loan or even rent an apartment, creditors check your credit score and history to determine the chances that you’ll pay them back. If you have a bad credit score, they will increase your interest rate to hedge against the chances that you won’t be able to pay the loan. If you have a great credit score, they’ll charge you less interest because they have confidence that you’ll be able to pay them back on-time, all the time.

Everyone has 3 credit scores, each from the 3 major credit reporting bureaus: Equifax, Transunion and Experian. Each of these credit bureaus will generate a FICO score and also their own scoring called a Vantage Score. Almost all creditors use the FICO score and not the Vantage score. So if you want to find out what your credit score is, buy the FICO score, not the Vantage score.

How the FICO score is figured has always been a little bit of a mystery. There are things that people generally know are bad for your credit such as late payments, bankruptcy or a foreclosure. But how badly it is affected was not known by the public. Now, FICO has opened the door to their secret calculation a little bit.

What we can see is that bankruptcy really does hurt your score the most, followed by a foreclosure in close second. For a more detailed analysis of what a drop in your FICO score equates to in real dollars, click here for the Yahoo Finance article.