Over the next couple of weeks, I will be concentrating the blog on the issue of re-establishing credit following a major issue (Bankruptcy, Foreclosure, Repossession, etc.). In most instances it is a lot easier to re-establish credit when someone had very late payments than if someone actually files bankruptcy.
The scoring model has 297.5 credit scoring points applied to payment history....so that is the most a person would ever lose by filing bankruptcy. More points are lost with BK, than late payments. Once the account is brought current, the number of points start to immediately come back to you. With a bankruptcy, this is not the case. You will find a major decrease in points for the first year.
One method to keep in mind is that if you reaffirm a car loan (or two), the credit score will be much easier to increase. The reasons are many.
You will get to keep the length of credit history on the existing account which is worth 127.5 credit score points. The scoring system awards more of these points for the longer a particular account has been open. By opening a new account you will lose these points because the new loan is only zero months old. Your existing car loan (that you re-affirm) will be awarded points based on the number of months old the account is (the longer the history, the better). Also keep in mind these 127.5 points have nothing to do with pay history. So even if you were behind, you get the same points for this portion of the score as a perfect history.
You will not be penalized by the activity portion of the score for opening up a new account (to establish credit). Any time you open a new account, there will be an inquiry into your credit (which costs you points) and you will open a new account (which costs you points).
Pay history. In order to re-affirm the account you will have to get the account current which will help you to start receiving some of the 297.5 credit scoring points awarded to the Pay History portion of the scoring model. Obviously, if you have always paid it on time, you will already be receiving these points.
The bottom line is, one thing to try to do if filing bankruptcy for some reason, is to keep a car loan open by re-affirming the debt.
More next week on Re-Establishing credit.