Written by San Francisco Bankruptcy Lawyer, Jeena Cho
Do you remember that scene in Fight Club where Brad Pitt’s character says “You are not your bank account”? If you have not watched the movie, I highly recommend it. So, what does Fight Club have to do with your credit score? Because, to quote from the movie,
“This is your life and it’s ending one minute at a time.”
Consider for a moment, your life and think about your goals. Let’s start with 5 years. Where would you like to be? What accomplishments have you achieved? How about in 10 years? In 20?
I don’t know what’s on your list, but I would probably guess correctly if I said - making monthly minimum payments on my credit card is not on that list. Maybe you would like to buy a home, or a car. Maybe take a vacation to Europe. Pay for your children’s college education. Whatever your financial goals are, you cannot get to the starting line as long as you are enslaved to your debt.
So many of my clients will sit across the table and say “But my credit score is 710!” or “I’ve always had excellent credit.” My answer is, “But what can you get with your 710 credit score?” If you are so in debt that you are on the hamster wheel making the monthly minimum payment every month, what good is having an excellent credit score? Having a good credit score is supposed to be an indicator that you are credit worthy, but nowadays, that score seems to mean less and less. New credit is more difficult to come by than ever and there is little sign that the economy is improving.
You have the choice. You can continue to struggle, draining your assets to try and maintain that “perfect” credit score, or you can face reality and make the decision to fix your financial problem - once and for all.
There is no doubt that filing for bankruptcy will have a negative impact on your credit score. However, the impact is not as severe as most people think. Consider the following. 30% of your credit score is determine by the amount you owe (your revolving credit.) So, if you are carrying a high balance on your credit cards each month, this can hurt your overall credit score. Another interesting thing to note is that 35% of your credit score is made up of payment history. For this reason, we find that about 1 year after bankruptcy, credit scores tend to re-bounce. Why? Because your debt-to-income ratio will improve after bankruptcy and you can help repair your credit score by making timely payments on all of your bills.
Source: FHA Lender
My advice is to think long-term and figure out what it is you want. Is it to be debt free and start saving for the future? Or continue to live in the past and pay off your debt for the next 5, 10, 15 or more years? Most credit cards will take over 30 years to pay off assuming you make the monthly minimum payments. If you’ve been stuck in the world of making monthly minimum payments, ask yourself, what’s my exit strategy?
