Bankruptcy and Public Record Impacts to FICO® Scores

What are the different categories of late payments and do they affect FICO® Scores?

FICO® Scores consider late payments in these general areas; how recent the late payments are, how severe the late payments are, and how frequently the late payments occur. So this means that a recent late payment could be more damaging to a FICO® Score than a number of late payments that happened a long time ago.

You may have noticed on your credit reports that late payments are listed by how late the payments are. Typically, creditors report late payments in one of these categories: 30-days late, 60-days late, 90-days late, 120-days late, 150-days late, or charge off (written off as a loss because of severe delinquency). Of course a 90-day late is worse than a 30-day late, but the important thing to understand is that people who continually pay their bills on time tend to appear less risky to lenders. However, for people who continue not to pay debt, and their creditor either charges it off or sends it to a collection agency, it is considered a significant event with regard to a score and will likely have a severe negative impact.

A history of payments is the largest factor in FICO® Scores. Sometimes circumstances cause people to be unable to keep current with their bills—maybe an unexpected medical emergency or losing a job. Creditors and legitimate credit counselors may be able to provide direction to people when they are having trouble responsibly managing their financial health. Late payments hurt scores and credit standing, but paying off late debt and getting current before the debt becomes a judgment or goes to a collections agency will have a positive effect on a score. However, you can never again get an account to a  "current" status once it becomes a judgment or is turned over to a collection agency.

How do FICO® Scores consider a bankruptcy, and how can I minimize any negative effects?

A bankruptcy is considered a very negative event by FICO® Scores. How much of an impact it will have on your score will depend on your entire credit profile. For example, someone that had spotless credit and a very high FICO® Score could expect a huge drop in their score. On the other hand, someone with many negative items already listed in their credit files might only see a modest drop in their score; that’s because their lower score is already reflective of their higher risk level. Another thing to note is that the more accounts included in the bankruptcy filing, the more of an impact on a FICO® Score.

While it may take up to ten years for a bankruptcy to fall off of your file, the impact of the bankruptcy will lessen over time.

If you file for bankruptcy, here are some things you should do to make sure your creditors are accurately reporting the bankruptcy filing:

  • Check your credit files to ensure that accounts that were not part of the bankruptcy filing are not being reported with a bankruptcy status.
  • Make sure your bankruptcy is removed as soon as it is eligible to be “purged” from your credit file.

While there are many things to consider when filing for bankruptcy, understand that the bankruptcy will impact your FICO® Scores for as long as it is listed on your credit files.

What are the different types of bankruptcy and how is each considered by a FICO® Score?

A bankruptcy is considered a very negative event by FICO® Scores regardless of the type. As long as the bankruptcy is listed on your credit file, it will be factored into your scores. However, as the bankruptcy item ages, its impact on a FICO® Score gradually decreases. Typically, here is how long you can expect bankruptcies to remain on your credit files (from the date filed):

  • Chapter 11 and 7 bankruptcies up to 10 years.
  • Completed Chapter 13 bankruptcies up to 7 years.

These dates and time periods refer to the public record item associated with filing for bankruptcy. All of the individual accounts included in the bankruptcy should be removed from your credit files after 7 years.

How do public records and judgments affect a FICO® Score?

 

Public records and FICO® Scores

Public records are legal documents created and maintained by Federal and local governments, which are usually accessible to the public. Some public records, such as divorces, are not considered by FICO® Scores, but adverse public records, which include bankruptcies, judgments and tax liens, are considered by FICO® Scores. FICO® Scores can be affected by the mere presence of an adverse public record, whether paid or not.

Adverse public records will have less effect on a FICO® Score as time passes, but they can remain in your credit files for up to ten years based on what type of public record it is. Judgments specifically remain in your credit files for seven years from the date filed.

A judgment in your credit file

Judgments will almost always have a negative effect. Creditors, collections agencies, and legitimate credit counselors may be able to provide direction, or negotiate a payment plan, to people when they are having trouble responsibly managing their financial health, and before a debt turns into a judgment.

Credit missteps – how their effects on FICO® Scores vary

People can run into financial difficulties that impact their FICO® Scores. Some difficulties may change your score by a small amount, while others can drop your score significantly. What your score was before the difficulty appeared in your credit files also can make a difference.

Here is a comparison of the impact that credit problems can have on FICO® Scores of two different people: Alex and Benecia. Note that their initial FICO® Scores are 100 points apart.

First, let’s give you a general snapshot of Alex’s and Benecia’s credit profiles:

Alex has a FICO® Score of 680 and:

Benecia has a FICO® Score of 780 and:

Has six credit accounts, including several active credit cards, an active auto loan, a mortgage, and a student loan

Has ten credit accounts, including several active credit cards, an active auto loan, a mortgage and a student loan

An eight-year credit history

A fifteen-year credit history

Moderate utilization on his credit card accounts (his balances are 40-50% of his limits)

Low utilization on her credit card accounts (her balances are 15-25% of her limits)

Two reported delinquencies: a 90-day delinquency two years ago on a credit card account, and an isolated 30-day delinquency on his auto loan a year ago

Never has missed a payment on any credit obligation

Has no accounts in collections and no adverse public records on file

Has no accounts in collections and no adverse public records on file

Now let’s take a look at how different credit missteps impact their FICO® Scores:

 

Alex

Benecia

Current FICO® Score

680

780

Score after one of these credit missteps is added to each credit file:

Maxing out (charging up to the limit) a credit card

650-670

735-755

A 30-day delinquency

600-620

670-690

Settling a credit card debt for less than owed

615-635

655-675

Foreclosure

575-595

620-640

Bankruptcy

530-550

540-560

As you can see, maxing out (charging up to the limit) a credit card has the smallest impact of these credit missteps. Declaring bankruptcy has the biggest impact to their scores. For someone like Benecia with a high FICO® Score of 780, declaring bankruptcy could lower her score by as much as 240 points. That’s because FICO® Scores generally give the most weight to payment history. Bankruptcy is included in one’s payment history. Also, a bankruptcy often involves more than one credit account, compared with a foreclosure which often involves just a single account.

High scores can fall farther. Notice that Benecia would lose more points for each misstep than would Alex, even though her FICO® Score starts out 100 points higher. That’s because Alex’s lower score of 680 already reflects his riskier past behavior. So the addition of one more indicator of increased risk on his credit file is not quite as significant to his score as it is for Benecia.

Settling a credit card debt is the third credit problem listed. It means that the lender agrees to accept less than the amount owed on the account. A settled account indicates a higher level of risk and typically happens only when an account is overdue. So in Benecia’s case, to help make the debt settlement plausible we also added a 30-day delinquency to her credit file. Her new FICO® Score reflects both changes. Alex’s credit file already included a recent delinquency.

Are you more like Alex or Benecia? Many different combinations of information in a credit file can produce a FICO® Score of 680 or 780. Depending on what’s on your own credit files, your experience may vary from that of Alex or Benecia, or be similar. In any case, if a person knows what’s in their credit reports at each of the three major consumer reporting agencies, he or she may be able to better understand the severity of impact of a financial misstep to their score.

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