What makes a healthy credit score
There are two key ingredients to a healthy credit score:
- Your debt to income ratio
Credit bureaus weigh your so called "debt to income ratio" very heavily when calculating your credit score. The simple fact is, if you are over your head in debt such as credit cards, medical bills, and payday loans, your debt to income ratio is going to look very bad and you are going to be burdened by that number for a very long time unless you pay off all your debts in full. For many people, of course, paying in full is simply not an option.
That's where bankruptcy comes in. Bankruptcy wipes out all that old, defaulted debt, without having to pay anything back. Bankruptcy thereby improves your debt to income ratio.
- Build a new on-time payment history.
Another major factor that drags down people's credit scores is the fact that they have a history of late payments or in many cases completely defaulted accounts. Once you default on a credit card or other account, after a period of time the creditor may do what's called "charge off" the account. Some people think this means they have given up collecting. Far from it! When a creditor "charges off" an account, they simply move the account from one column on their accounting books to another, because they are not allowed to claim that account as "good paper" so to speak. But that does NOT mean they are giving up on collecting against you. Rather, an account charge-off is usually the first step prior to an account being handed over to debt collectors and attorneys for more aggressive collection measures, or for filing a lawsuit against you.
Bankruptcy allows you to get rid of the old debt, and then focus your efforts on rebuilding your on-time good payment history. Rather than avoid credit cards after bankruptcy, I strongly encourage people to get them! The reason why is that having a new credit card account and making good, on time payments towards a balance is one of the single best things you can do to rebuild your credit score! (Just keep it under a sensible limit and you'll be fine.) Essentially the new positive payment history is going to override the old payment history with all of the late payments.