Filing for bankruptcy can offer a much-needed reprieve from debts when your financial obligations become too much to handle. If you have concerns regarding what bankruptcy might do to your future interest rates, however, it might seem like a lose-lose situation.
While it is true that bankruptcy can have an effect on your interest rates, it can still be the case that bankruptcy may be your best option for getting your finances back in order. You can make an informed decision by knowing just how much bankruptcy can affect interest and what you can do afterward to achieve favorable rates again.
Does filing for bankruptcy lead to higher interest rates?
When you take out a mortgage or any other loan, creditors often look to your credit score as an indication of how reliable you are when it comes to repaying debts. Bankruptcy can have an immediate effect on your credit score, possibly lowering it by as many as 100 points or more all at once. Experian explains that many lenders consider a score below 669 to be fair while a score below 579 is poor, illustrating that bankruptcy can indeed lead to higher interest rates.
How quickly can you lower interest rates after bankruptcy?
Climbing back up to a good credit score after bankruptcy can take several months, but there are positive steps you can take to accelerate the process. Budgeting, paying bills on time and regularly using a secured credit card are good habits for steadily building credit and therefore lowering interest rates.
Bankruptcy may be the right decision for restoring financial control to your life, but it is important to know the potential drawbacks. Having a bankruptcy on record can make lenders perceive you as a risky borrower, but you can restore your reputation through good habits.