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How will filing for bankruptcy impact my credit score?
Credit card debt has been increasing nationwide, with the total amount owed now sitting at $1.14 trillion. For the average person, this translates to a credit card balance of about $8,000, an amount that many people struggle to pay off. Part of the issue is that the average credit card interest rate now surpasses 23% and the average retail card rate now sits above 30%, and as the interest charges compound, cardholders — including those who make consistent payments — may find that their balances barely shrink.
If your credit card debt balloons and becomes unmanageable, you may find that you’re seriously considering bankruptcy as a solution to your high-rate debt. But while filing for bankruptcy can result in discharging or restructuring your debt, allowing you to start fresh, it also carries significant consequences that are important to factor in.
Chief among these is the substantial impact bankruptcy has on your credit score, which can, in turn, damage many areas of your financial health. So, before you file for bankruptcy, it’s essential to weigh the benefits of clearing your overwhelming debt with this method against the potential damage to your creditworthiness.
Start comparing your debt relief options here.
How will filing for bankruptcy impact my credit score?
Filing for bankruptcy can significantly damage your credit score. When you file for bankruptcy, your credit score typically drops by 100 to 200 points or more, depending on where you started. This means someone with a credit score of 680 may see their score plummet to between 480 and 580 after filing.
That said, the impact on your credit also varies. The more robust your credit score was initially, the bigger the impact bankruptcy will have as a result. However, if you were already missing your credit card payments or carrying high balances, your credit score may have already taken significant hits before filing and a bankruptcy may have less of an impact.
The damage can also last a while. A Chapter 7 bankruptcy, which allows most unsecured debts to be discharged, typically stays on your report for 10 years, while a Chapter 13 bankruptcy, which involves a repayment plan, remains for seven years. During this time, the bankruptcy notation on your credit report can make it more challenging to qualify for new credit or loans. Lenders may consider you a high-risk borrower and offer higher interest rates or stricter terms if they do extend credit.
The good news is, though, that after bankruptcy, your score can recover with responsible financial behavior over time. Though the bankruptcy will remain visible on your report, many people begin to rebuild their credit through secured credit cards, low-limit cards or credit-builder loans. Adopting good habits — such as making on-time payments and keeping balances low — can also help you gradually regain a higher score, even while the bankruptcy is still on your record.
Learn how your debt relief options could help you avoid bankruptcy.
What other debt relief options do I have?
Before considering bankruptcy, it can make sense to explore these alternative debt relief options, which may have less severe impacts on your credit score:
Debt consolidation
Consolidating high-interest credit card debt into a loan with a lower interest rate can reduce your monthly payments and simplify the debt management process. While consolidation may temporarily lower your credit score by 10 to 30 points due to the credit inquiry and new account, this impact is typically much less severe than bankruptcy and your credit generally recovers within a year if payments are made on time.
Debt management plans
Working with a credit counseling agency to enter a debt management plan can help lower your interest rates and create a structured repayment plan. Debt management plans typically have minimal impact on your credit score, and some creditors may even re-age your accounts to current status after several successful payments.
Credit card hardship programs
If you’re struggling due to a temporary financial setback, many credit card issuers offer hardship programs that can temporarily reduce interest rates or monthly payments. These programs may or may not affect your credit score, depending on how the issuer reports the arrangement to credit bureaus, so always ask about the credit reporting implications before enrolling.
Debt forgiveness
Pursuing debt forgiveness can reduce your total balance by 30% to 50% in many cases, and while debt forgiveness can damage your credit score, the impact is usually less severe than bankruptcy. The associated accounts typically show as “settled” or “paid as agreed for less than the full amount” on your credit report and remain for seven years. However, your score may drop by 60-100 points when accounts first go delinquent during negotiations.
The bottom line
Ultimately, the decision between filing for bankruptcy or pursuing an alternative debt relief option is personal. Bankruptcy can offer a fresh start when you’re buried in high-rate credit card debt, but it’s essential to consider the long-term impact on your credit score and financial health. It can also help to weigh your other debt relief options, such as debt consolidation, debt forgiveness or debt management, as they could help you avoid bankruptcy, though they may not offer the same level of immediate relief.
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Starbucks looks to hit reset button. Here’s how its new CEO plans to renew the aging brand.
Starbucks is looking to turn its business around by being less of a fast-food chain and more of a neighborhood coffee house.
Brian Niccol, the struggling company’s new CEO, on Thursday shared his vision of Starbucks becoming “a welcoming coffee house where people gather and where we serve the finest coffee.”
Talking to analysts for the first time since taking the job on September 9, Niccol laid out his plan to reverse a trend illustrated in the company’s fiscal fourth-quarter results, which had same-store sales down 7%, the third straight such drop. For the full year, Starbucks said its revenue rose less than 1% to $36 billion.
The Seattle-based coffee giant released the bad financial news last week and said that it would suspend financial guidance for its 2025 fiscal year to give Niccol time to assess the business.
“It is clear we need to fundamentally change our strategy to win back customers and return to growth,” said Niccol, who labeled the earnings report as “very disappointing.”
Looking to placate customers turned off by higher prices and longer wait times, Niccol said Starbucks would not hike its prices during its current fiscal year, which began at the end of September, and is taking steps to deliver orders in less than five minutes.
“We probably have about 50% of our stores or 50% of our transactions already happening less than 4 minutes. So we know it’s very doable,” Niccol said. “We just need to do it in all our stores in every transaction.”
Starbucks is also working out kinks in its staffing levels as its baristas contend with in-store, drive-thru and online orders, not to mention ceaseless customization choices, the CEO said.
The coffee giant plans to cut back on its overly complex menu and focus on fewer but tastier offerings, while taking steps to “better separate mobile order pickup from the cafe experience,” Niccol said.
Starbucks will discontinue its Oleato olive-oil infused beverages from most locations starting early next month, axing what longtime Starbucks leader Howard Schultz called a “transformational idea” when he introduced it in Italy early last year.
Starbucks will stop charging extra for nondairy milk
As of next Thursday, November 7, Starbucks will stop charging more for nondairy milks at its corporate owned and operated cafes across North America. The option to pick oat, soy or coconut milk is the company’s most popular customization after an extra shot of expresso, Niccol said. Once in place, nearly half of those that pay for a modifier could see a price reduction of 10% or more when they choose a nondairy milk, according to the executive.
At a Starbucks in Michigan, for instance, it cost 70 cents to switch to almond milk in a medium Pumpkin Spice Latte.
The switch comes after a lawsuit earlier this year by three California residents who claimed the extra charge for nondairy substitutes marked a form of discrimination against people who are lactose intolerant or have other dietary restrictions.
Starbucks also plans to bring back self-serve condiment coffee bars in all of its cafes by early 2025. The company had moved its milk, sugar and simple drip coffee behind the bar during the early days of COVID-19, but the switch back should give its baristas more time to craft the lattes, macchiatos and other less straight-forward drinks.
Further, Starbucks plans to offer ceramic mugs to those looking to drink their hot beverages at Starbucks, and provide more comfortable seating to make its locations appealing to people who want to sit, work and meet. It also plans to bring back Sharpie pens so baristas can write a message on a customer’s order.
“While we are confident in the strategy, we anticipate that the turnaround will take time, as Starbucks faces persistent challenges across key markets, including China, alongside rising competition, high prices, long wait times, and staffing shortages/turnover,” Arun Sundaram, equity analyst at CFRA Research, wrote in a note.
While early in its turnaround, much of what Niccol laid out seems sensible, according to Neil Saunders, managing director, retail, at GlobalData.
“One of the big issues a lot of customers have with Starbucks is the wait time for drinks and the queue lengths in some stores,” Saunders said. “Generally, most people want a quick coffee fix when they’re on the go – that makes timeliness and efficiency paramount. Starbucks has faltered on delivering this over the past couple of years,” according to the analyst. “This is a critical fix if Starbucks wants to rebuild sales.”
At the same time, Starbucks also needs to consider customers who want to linger, as it is “increasingly competing with independent coffee shops which often have a great vibe,” Saunders said.
Niccol stepped into his new role weeks after the caffeine purveyor ousted Laxman Narasimhan, whose 18-month stint at the helm was marked by sluggish sales, and amid a waning fondness for the brand, particularly among Americans.
A restaurant executive for 20 years, Niccol is credited with reviving Taco Bell’s image and for turning things around at Chipotle after a series of food-safety issues.
There are nearly 40,000 Starbucks stores worldwide, and roughly 17,000 locations in the U.S.
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