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Restoring credit scores after bankruptcy

May 14, 2012 | | Comments Comments Off

Dear Liz: I had credit scores over 800 with no late payments ever. Unfortunately, a medical issue required me to charge $24,500 to a credit card. That led to a bankruptcy, which was discharged in July 2011. My scores dropped to 672, and they’re currently around 680. I’m paying two unsecured credit cards in full each month plus an auto loan that was reaffirmed in bankruptcy. I would like to continue rehabilitating my scores by applying for another loan. When a company requests my credit scores, does it also see my bankruptcy, and would that prevent me from getting credit?

Answer: Some lenders look just at credit scores, while others request credit reports along with your scores. Your bankruptcy or your scores could cause lenders to charge a higher interest rate or refuse to give you credit.

It’s not clear that the scores you’re seeing are FICO scores, however. A bankruptcy would have dropped your FICOs into the 500s, and it’s unlikely they would return to the high 600s in less than a year. What you may be seeing are VantageScores, which have a different score range: 500 to 990, compared with FICO’s 300 to 850.

If you want to see your FICO scores, which are the ones most lenders use, you can buy them for about $20 each at MyFico.com. Scores offered at other sites typically aren’t FICO scores but may be VantageScores or “consumer education scores” that aren’t widely used by lenders.

You’re doing the right things by using a mix of credit (credit cards and an installment loan) and paying your bills on time. You should know, though, that there’s no way to quickly restore your scores to their old levels. It typically takes seven to 10 years for FICOs to recover from a bankruptcy.

But let’s back up a minute. You almost certainly made a mistake by charging your medical care to a credit card. You may have been able to qualify for a discount on your care if you hadn’t. Many medical providers offer charity programs that cut or eliminate the bill for people making up to 400% of the federal poverty line. A single person could make up to $44,680 and still qualify for a break under many providers’ programs.

If you make too much to qualify for financial aid, you could still have negotiated a discount by asking the provider to charge you the same rate that its largest insurer pays. The uninsured are often charged a much higher “sticker price” for medical care than what insurers pay, but if asked, many providers are willing to provide the same discounts.

If nothing else, you probably could have qualified for an interest-free payment program. Once you charged the bill to your card, however, you lost all your leverage to get a discount.

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