YOUR CREDIT SCORE: HOW IT’S DETERMINED,

and HOW BANKRUPTCY AFFECTS IT

Your credit worthiness is determined by several factors, and one important factor is your credit score, which is derived by comparing the information on your credit report to those of other people. One of the things we cover in a Free Initial Consultation is how your credit score can improve faster after filing bankruptcy. For a Free Initial Consultation, call 210-930-7000 to schedule your appointment.

Lenders use all of the information on your credit report to derive a credit score on you. A credit score is a number used to predict your willingness and ability to repay new credit. The most widely used scoring system is known as the Fair-Isaac Corporation (FICO) Credit Score. This score ranges between 200 and 850. According to FICO, 40% of the population score at 690 or lower, while 40% score 745 or higher, with just 20% above 780.

A FICO score is based on information found within your credit report. The 5 basic categories in order of importance are:

1. Payment History – refers to payments being made on-time or late, judgments, bankruptcies, collection accounts, and so on.
2. Outstanding Debt – examines the number of outstanding balances, average balance, and ratio of total balances to total credit limits on revolving debt (i.e. credit cards).
3. Credit History – refers to how long you have had your oldest account.
4. Pursuit Of New Credit – examines when and how many inquiries and new accounts there are.
5. Types Of Credit In Use – refers t the number of reported accounts in the various credit card categories (bank cards, travel & entertainment, and so on).

Other factors that lender look at to determine who is a good credit risk are:

1. Education Level. The higher the better.
2. Length Of Time At Your Current Residence. If you move around a lot, you lose points, but if you relocate for a better job and show your income is higher, then that helps you get points.
3. Length Of Time At Your Current Job. The longer you have been at your job, the better risk you appear to be.
4. Homeowner v. Renter. Homeowners are considered better credit risks than renters.

Your credit score is determined by comparing your credit to those of other people in the general population. Here’s an important point about your FICO score and how bankruptcy affects it: After you file bankruptcy, your credit is compared only with those people that have filed bankruptcy. So, if you manage your finances well, you can increase your credit score higher and faster than you would be able to do outside of bankruptcy. ( For more information on this point, read this book: The Ultimate Credit Handbook, by Gerri Detweiler, president, Ultimate Credit Solutions, Inc., Sarasota, Florida.) This should not be seen as a reason to file bankruptcy. I point this out to counteract the misinformation about the effect of bankruptcy on your credit.

Got Debt? Need Help? Call Us!

Call 210-930-7000 to schedule your Free Initial Consultation.