2 Years After Bankruptcy, My Credit Is Still Bad — Why?

The decision to file bankruptcy isn’t an easy one, but it does offer a way out for those who are faced with debts that they won’t ever be able to pay. And while it offers a chance at a fresh start, trying to repair the damage bankruptcy does to your credit can be downright frustrating, as one of our readers explains in this question:

Our credit score dropped by approximately 100 points when we filed for bankruptcy. Prior to that, we actually paid our bills on time, but it got to a point where we knew it was no longer going to be that way so we had to file. The decision to file bankruptcy was the hardest decision of my life and I’m still not sure it was for the best. Two years later we now have two car loans and a line of credit but our credit scores have not moved. I’m frustrated and I’m not buying into this credit score thing and “making it better.” We don’t have credit cards, yet every website says to get a card. I don’t want a credit card! I like having to rely on the cash I have and I’m not interested in credit cards at all. So while I pay all of my bills on time, including several student loans, my credit score never moves… and there seems to be no great explanation as to why. What gives?

What’s the Deal With Your Credit Score?

We know it’s frustrating, but because your bankruptcy is still quite recent, it’s going to take some time before you begin to see any significant improvement in your credit scores. And even then, there are certain steps you’ll need to take in order to see the results you’re hoping for.

Depending on the type of bankruptcy, the record will remain in your credit report for the next 7-10 years. Does this mean you’re sentenced to bad credit scores for the full 7-10 years? Absolutely not, but expecting significant results in just two years isn’t realistic, either.

Before you do anything else, it’s important to make sure the bankruptcy is being reported accurately and to find that out, you’ll want to pull copies of all three of your credit reports.

Because bankruptcies typically affect numerous accounts in your credit report, there’s a higher chance of errors in how the bankruptcy is reported. This alone may be one of the reasons why your score hasn’t moved, but before we get into other possible reasons, this step should come first.

As you’re reviewing your credit reports, pay close attention to how each account is being reported. For one, all accounts that were included in bankruptcy should clearly show a notation that states the account was “included in bankruptcy.” If the accounts were included in bankruptcy, there shouldn’t be any record of balances or past due amounts. If there are, you’ll want to file a dispute to have them corrected to show zero balances. Here are two resources that can help:

Moving Forward After Bankruptcy

Once you’ve verified that the bankruptcy is being reported accurately, you can focus on your improvement plan — which starts with learning how credit scores work and understanding the value of time.

The older the bankruptcy gets, the less impact it will have on your scores. But right now, with it just hitting the two-year mark, it’s still at its most damaging stage. This is because credit scores place the most emphasis on the most recent 24 months, which means it’ll take a minimum of two years before you begin to see any improvement. Even then, it will happen gradually — provided that you’ve taken steps to strategically add new, positive credit information to offset the negative damage caused by the bankruptcy. The key is adding the positive information, which is more than just paying the accounts on time. Paying accounts on time is important, but it’s only 35% of the score — that means there’s another 65% that has nothing to do with how well you pay your bills.

Assuming the two auto loan accounts were established after the bankruptcy (meaning they aren’t accounts that were included in bankruptcy), then you’re off to a good start. The same holds true for the line of credit.

I’d be remiss if I didn’t tell you that adding just one credit card could actually help you here, too. I understand your reasons for not wanting to open a credit card account but the fastest, most effective way to recover from bankruptcy is to show the scoring models that you’ve learned from your mistakes and are able to manage a wide range of different types of accounts (a factor that’s considered in your credit score calculation).

The goal wouldn’t be to charge up more debt, but instead to use the card as a tool for re-establishing great credit. The best way to do this would be to use the card for small purchases, perhaps even purchases you typically pay with cash — a utility bill, for example, and then paying the balance in full at the end of each month. This would help you avoid paying interest and keep you from falling into debt.

In the end, to make sure you’re taking the right steps to repair the damage caused from bankruptcy, the best advice is to get a clear understanding of how credit scores work. To get you started, here are three great resources that will help:

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