What happens to your credit score after bankruptcy?

What happens to your credit score after bankruptcy?

In Australia, the typical duration of bankruptcy is three years and one day from the date your bankruptcy application is accepted. During this time, a trustee is appointed to help you clear your debts or resolve issues with your creditors. However, the names of those declared bankrupt are listed in the National Personal Insolvency Index (NPII), which is a permanent, publicly-searchable record. 

Bankruptcies and insolvencies are among the many incidents tracked by credit reporting agencies that have an impact on your credit score. These incidents have a deeper and longer-term impact on your credit score than other incidents such as missing a bill payment or making too many credit inquiries. Once your bankruptcy is reported to the credit reporting agencies, they will update your credit score, and you’ll see a fall in your credit score. The incident will also most likely be included in your credit report for at least five years, or longer if you don’t discharge your bankruptcy by then.

What is your credit score after bankruptcy?

If your debt is getting on top of you for whatever reason, you may be forced to file for bankruptcy. While going through a bankruptcy proceeding may relieve you of the burden of paying off some of your debts, there are long-lasting consequences that you need to consider.

Since bankruptcy is considered a public concern, it becomes part of your credit history even after you discharge it. This ensures that lenders or others you’re looking to enter a financial agreement with can find out about your bankruptcy, you are also obligated to inform them directly. The credit reporting agency will also include your bankruptcy on your credit file for either five or two years from the date your bankruptcy is considered discharged or cleared. This is based on the calculation that the usual duration of bankruptcy is three years and one day. If, however, your bankruptcy trustee has any objections, this can get extended to as much as eight years.

Some of your creditors may have also reported payment delays to the credit reporting agency before you declared bankruptcy. If you had a good credit score before you started facing financial issues, it might’ve decreased due to these incidents. You may then see it reduce even further once you’ve declared bankruptcy.

How to improve your credit score after bankruptcy

A low credit score can make it difficult for you to borrow money, whether or not you have a bankruptcy listed on your credit report. Bankruptcy is, however, seen as one of the worst marks you can have on your credit file. Despite this, you can take steps to improve your credit score after bankruptcy. Some of the steps you can take include:

  • Pay off all debts in time: You can work out a suitable payment plan with your credit card company or other lenders. You can even get the help of your bankruptcy trustee, to build a plan helps you clear all outstanding debts at the earliest possible chance. You should make sure that you make as many payments as possible by the due date, or renegotiate the repayment terms with the lender so that they don’t report a default against you.
  • Don't apply for new credit: It’s equally important not to take up new debt until your bankruptcy is off your file. If you really need the credit, discuss it with your bankruptcy trustee. You can then plan in a way to ensure you repay it without further risking your financial well-being. You may also find it difficult to borrow while going through a bankruptcy or may face strict repayment terms.
  • Save as much as possible: Having healthy savings can help you settle existing or future debts. It also gives lenders a better opinion about your financial responsibility and ability to repay debt. You may want to find a way to increase your income, or you may need to moderate your expenses, to build up your savings.
  • Check your credit score from time to time: Since you can check your credit score for free, you should plan on doing so as you work towards exiting bankruptcy. This can help you get a sense of how repaying and avoiding debt and building savings are helping improve your credit score.

How soon will my credit score improve after bankruptcy?

Once you work your way out of debt and start taking steps to rebuild your credit score after bankruptcy, consider checking your credit score often. This can give you an idea of the rate at which credit reporting agencies update your credit score. You should remember that your credit score may not increase significantly as long as the bankruptcy is part of your credit history. Be careful of people who approach you and claim they can get your credit history cleaned. Credit reporting agencies are the only people who can clear your credit file and do so at specified times. You may be able to approach them to have any incidents removed sooner if you have sufficient evidence to convince them.

In case you need advice on the credit transactions that can help you improve credit score after bankruptcy, consider consulting a financial counsellor. They don’t have access to the methods used by credit reporting agencies, but their knowledge can help you restore your financial health and avoid further debt.

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Learn more about credit score

Does a credit score check impact your credit score?

You may have heard that when a bank or lender performs a credit check, that it can impact credit score. But checking your own credit score isn't the same, and won't affect your credit score in the same way.

There are two types of credit checks that can be recorded in your credit history: hard credit checks and soft credit checks.

Hard credit checks occur when you apply to borrow money from a bank or lender, such as when you apply for a credit card or loan. A soft credit checks occur when your credit file is accessed outside of applications to borrow money, such as when you check your own credit score or credit history.

Checking your credit score is a request for information and not an application to borrow money, so it should not affect a lender’s decision to accept or decline your credit applications. As such, it's a soft credit check, and is unlikely to affect your credit score, positively or negatively.

 

What are some advantages of a good credit score?

You should know about the advantages of credit score improvement as there are many occasions when having a good score is helpful. If your credit score is categorised as good, very good, or excellent, it can indicate you have strong borrowing power. This may encourage lenders to give you special discounts on interest rates and other loan terms. You may also find it easier to get approved for a credit card or a property rental. You can also try to negotiate terms using your superior credit score as leverage.

A high credit score indicates that you are financially responsible, but it requires you to be disciplined. If you currently have a good credit score, you still need to remember not to apply too often for credit cards or loans as these can quickly pull down your score. On the one hand, you may have better access to credit, but your good financial habits mean that you may not need to access this credit. Having some credit products can help build up your credit report, and therefore your credit score. You would just need to keep the debt and limits to a minimum and pay the bills on time. It’s never advisable to take out credit that you can’t afford to pay as it negatively impacts your credit history.  Even if you have a good credit score, you can always improve it further.

Why should I check my credit score annually?

You may not need to get your free credit rating every year, but it can help you stay informed. A yearly free credit report can help Australians keep track of the impact of various financial transactions on their credit score.

Your credit score helps inform financial organisations, particularly lenders, about the sort of payer you are. Depending on how you've paid down debt in the past, it will have affected your credit score in various ways. In Australia, the inclusion of Comprehensive Credit Reporting (CCR) means that you can find out which transactions affect your credit score positively, as well those that have a negative impact.

Because of this, you may want to consider getting a free credit report once a year irrespective of whether you’re planning to apply for a loan or take on other debt. Checking your credit report can tell you if there are errors in your credit file, which affect your credit score and need to be corrected.

What if your credit score has dropped for no reason

The importance of checking your credit score regularly is hard to overstate as the changes may not be as relevant to your life, and there may be the occasional error, but what should you do if it drops for no reason?

Credit reporting agencies calculate your credit score based on the information they receive from lenders, banks, credit card providers and utility companies, among others. This report takes into account both the credit enquiries these companies make, as well as your payment history with them, and may include other factors. But because some reports may come in at different times, delays can appear like drops. 

Suppose you missed paying a bill while on holidays and the supplier couldn’t reach you, or something like it -- in this instance, the provider may report the default to the credit reporting agency, which can cause your credit score to fall when the credit reporting agency eventually sees the information. Because of an obvious delay, the drop can seem random.

Regularly checking your credit score and the transactions that have appeared can provide some understanding as to why a credit score drop might have occurred, and even provide some understanding as to how you can fix the drop, improving your credit score in the process. 

Does borrowing money affect credit score?

Whether it’s through a home loan, a personal loan, or a credit card, borrowing money will affect your credit score. Taking on a home loan or a credit card may have a positive impact on your score, but too many loan applications can bring your credit score down.  

Every time you apply for credit, an inquiry is performed against your name. Too many inquiries can reflect negatively on your credit report, and if your loan application is rejected it will negatively impact your credit score.

How you handle your debt can also make a big difference. As long as you make timely payments you may be able to improve your credit score and overall creditworthiness. However, any missed or delayed payments will likely result in a negative impact on your credit score.

How regularly does your credit score change?

There are plenty of things that can affect your credit score, but when they'll impact it can vary wildly, and often depend on when the information has been passed on.

Every credit enquiry is noted on your credit file, and this impacts your credit score. Thanks to Comprehensive Credit Reporting (CCR), it means you both positive and negative transactions can impact your score, but so, too, can the frequency. For instance, if you apply too often for credit cards or apply with multiple lenders for a home loan and aren't successful, you may see a decline. 

How long this information take to pass on is an important question, but the length of time often depends on the credit reporting agency. Some transactions can take a small amount of time, while others take much longer. For that reason, it's important to check your credit history regularly so you can be more aware of what your credit score looks like, and if you need to correct any of the statements made on it. 

Do landlords check credit scores?

For landlords, credit score checks can tell if a potential tenant has a history of delayed or missed rent payments. Usually, a poor record of repayments is likely to result in a low credit score. Also, your credit history may include information from tenancy databases such as the number of times landlords have inquired about your credit score. 

If there are too many inquiries within a short time, landlords may conclude that you have had issues renting in the past.  However, there is no rule as to when landlords check your credit score. Some might check every time they receive a tenant’s application. In some cases, landlords may even rent out their property to tenants with a poor credit history if they can submit additional documents or sufficiently explain their situation and how they are trying to address it.

 What credit score do landlords look for?

Landlords may look for issues relating to repayment rather than a specific credit score, although a low credit score probably suggests that you’ve had repayment issues. In general, if your credit score is categorised good, very good, or excellent - which corresponds to an Equifax credit score range of 622 - 1,200, landlords may not scrutinise your credit history too closely.

What can impact my credit score?

Your credit score isn't set in stone and can change with every financial decision and action you take. While you checking your score is a soft check and won't impact the result, payments and other actions can affect the score. 

The very things that can impact your credit score include your payment history (late or on time), the age and type of credit you have and owe, your debt balance (both current and delinquent, if any), recent payment behaviour, the credit available to you presently, and if you have any court judgements or actions resulting form bankruptcy.

Australia's Comprehensive Credit Reporting (CCR) also tracks your positive payments, and allows your credit score to be impacted positively, as well. 

Where can I check my credit report for free?

While you can get a free credit report in multiple ways, RateCity's own credit checking system allows you to find your score from two credit history systems, Experian and Equifax. 

When you request your free credit report, you'll likely need to supply some personal information, such as your name, contact details, and a personal identification, such as a drivers license number or another form of identification. 

Not only does a credit report show credit score, but it usually often contains positive and negative credit transactions covering the past five years of payments. 

What is a good credit score?

Across Australia's major credit score providers, Experian and Equifax, there are five tiers, ranging from "below average" to "fair" to "good", "very good", and "excellent", with your score designating where you sit. As the tiers suggest, an Experian credit score between 625 and 699, and an Equifax credit score between 622 and 725, is technically considered to be in the range of "good". Anything above this is even better.

However, lenders will typically favour the borrowers with the highest credit scores which means that applicants with a "good" credit score may not be offered an interest rate as competitive as one offered to a borrower with a "very good" or “excellent” credit score.

Can a bad credit score affect rental applications?

A landlord may check your credit score to work out how trustworthy you are, and whether you'll pay your rental obligations on time. So, can a bad credit score cause you to miss out on renting property?

When looking at your credit score for rental applications, landlords may not see a low score as a reason to instantly reject applications. Some may be more generous, and could be willing to consider a tenant with a lower credit score, or even request some form of additional deposit to act as security against possible future problems.

Alternatively, you may want to consider asking a guarantor to co-sign your lease, which gives the landlord peace of mind as they have an alternate payment source if you cannot make payment.

Can a debt collector affect your credit score?

When a creditor is unable to contact you by phone or by sending you a formal notice in regards to outstanding debt, they will often outsource the job to a debt collector. The debt collector can try to reach you by phone, or they can attempt to contact you face to face. If they cannot get through to you by either method, they can only report back to the creditor but not directly report a payment default to the credit rating agency. So, can debt collectors affect your credit score? No, they cannot do so directly.

However, if you owe money, you have an obligation to return it or communicate your difficulty in doing so to the creditor as well as to any involved debt collector. If they cannot contact you, they can report a serious credit infringement against you, which may affect your credit score for many years. Creditors can also take the legal route, and a court judgment against you can also severely impact your credit score.

You should remember that debt collectors need to abide by specific rules and cannot harass you by repeatedly calling or visiting you, or by threatening to confiscate your possessions if you don’t pay up. Similarly, they cannot threaten to file a default against you, especially with a credit bureau.

Does breaking a lease affect your credit score?

When you sign a lease, you’re agreeing to pay rent for a certain period. But what happens in case you need to break the lease midway? Does breaking a lease affect your credit score? 

If you’re planning to break a lease early, you might be required to give a certain amount of notice, pay two months' rent and an early termination fee, or you should be willing to forfeit your security deposit.

If you’re able to pay all dues before moving out, breaking the lease is unlikely to affect your credit score. However, if you leave without paying, your landlord could use a collection agency to collect any unpaid rent. Your landlord could even sue you, and if you lose, you may have to pay the dues and court costs. While landlords typically don’t report unpaid rent to credit bureaus, there’s a possibility that a collection agency will report it. Collection mentions can stay on your report for several years and may affect your credit score.

Furthermore, breaking a lease could create issues when you're looking to rent in the future. A future landlord could contact previous landlords or check your rental history, and any mention of a broken lease could make you appear as a high-risk tenant, putting the rental application at risk.

Does home loan pre-approval affect credit score?

Home loan pre-approval can give you a better idea of the amount you can spend when buying a property. It can also tell you about the steps you need to take to finalise your home loan and receiving the funds. Depending on how you approach a lender, pre-approval could include a credit inquiry which does affect your credit score. Some lenders, however, may offer an online pre-approval which is faster and doesn’t involve a credit history check. An online pre-approval may only consider your financial capacity and offer suggestions on how to prepare yourself to take a home loan.

Most lenders, however, will likely prefer to make a full assessment of your financial situation by requesting a credit report in addition to your bank statements and tax returns. Such a credit inquiry, sometimes called a hard pull, is usually recorded on your credit file and can therefore affect your credit score. If you approach several lenders and all of them initiate credit inquiries, this will impact your credit score negatively. Sometimes credit reporting agencies make an exception in terms of including multiple credit inquiries if they are made within a certain period. It would still be best to avoid making multiple applications with different lenders.