Your credit score is the most commonly used method of risk assessment, it helps lenders and creditors determine just how much risk they’ll be taking on if they choose to approve you for new credit or a new loan. In addition to this, potential lenders and creditors will often also use your credit history, your income, financial situation, and the lesser known bankruptcy score to assess risk levels.
If you’ve never heard of a bankruptcy score, don’t worry, you aren’t alone.
How It Works
Your bankruptcy score is one method lenders use to calculate the probability that you’ll need to declare bankruptcy. This determination is made based on a 24-month window, meaning they assess the likelihood of you going bankrupt within a period of two years.This determination will then help them judge whether or they should lend to you. After all, they most likely won’t want to lend to someone who might go bankrupt soon after.
If you ever end up having to declare bankruptcy, a lender will then be responsible for the amount of money you are unable to pay back. Therefore, your bankruptcy score helps those would-be lenders determine what might happen if they grant you a loan.
One way in which your bankruptcy score is different is that you cannot view it or purchase it like you would your credit score. In fact, that information is usually only viewable by potential lenders. The circumstances of how your bankruptcy score is calculated are also not predetermined. Depending on the lender, a lower score might be more advantageous, while to others, a higher bankruptcy score is more favorable.
How Does a Bankruptcy Score Differ from a Credit Score?
Both your credit score and bankruptcy score are used by would-be lenders to determine your level of financial risk and how much credit to lend you, if at all. However, beyond this, these types of scores don’t have much else in common. You might still be considered a bankruptcy risk, even though you have a high credit score. Both types of scores are set in place to calculate a distinct variety of financial uncertainty and both scores are needed by a potential lender to paint a solid picture of who exactly is borrowing from them. In most cases, a borrower who is in danger of declaring bankruptcy is going to show signs before it happens. The following are only a few of those warning signs:
- The borrower is using up more and more credit all the time.
- They’ve amassed a number of new loans, credit cards, and payday loans.
- They’ve had a large level of debt that’s lasted for months if not years.
- They’re clearly getting by day to day by using their credit cards.
It’s important to note here that these factors are just the most common reasons why a lender might assess that someone is a bankruptcy risk. In reality, the majority of lenders will have their own set of methods for determining someone’s bankruptcy score and the way it will be used to assess their risk.
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Ways You Can Make Your Bankruptcy Score Better
The fact is, you can’t gain access to your bankruptcy score. Because of this, it’s difficult to come up with a proper method of maintaining a favorable one. However, you’ll know that your bankruptcy score is more than likely negative if you end up getting rejected when you apply for a loan. Therefore, the best thing you can do to change this situation is work towards improving your financial situation in general.
You can start by making the same improvements that you would if you wanted to make your credit score more favorable. Such as:
- Pay off as many of your debts as you can, both small and large.
- Be sure to pay whatever bills you have in full and on time.
- Use your current credit responsibly.
- Pay close attention to how much available credit you’ve been using. Carrying balances on many credit cards is definitely a warning sign to potential lenders.
Tackling Your Debt First
There are a number of ways in which bankruptcy can happen, medical expenses, loss of employment, or overuse of credit. If you’re in a ton of debt and are about to declare yourself bankrupt, before you do so, get in touch with a professional credit counselor or financial advisor. They’ll assess your level of debt and come up with the best solution for your current financial problems.