Lenders use a bankruptcy score to analyze your loan
What Is a Bankruptcy Score?
by Bill Hardekopf
I Really Want to Avoid Bankruptcy
What You Should Know about Declaring Bankruptcy in Retirement
Should I File for Bankruptcy after My Divorce?
If you are close to bankruptcy, your lenders probably already know about it. Credit reporting agencies have their own formulas that predict the likelihood of bankruptcy. The general public never sees these bankruptcy scores, but they are sold to lenders, and these lenders use the scores when considering loan applications.
Bankruptcy scores are similar to credit scores. The scoring models pull information from consumer credit reports.
Experian's BankruptcyPredict uses Visa transaction spending characteristics, Experian consumer credit information and balance trending data as well as the most current credit card transaction and credit profile behaviors for consumers. It uses this data to predict the consumers most likely to create bankruptcy losses for lenders over the next 24 months.
FICO Bankruptcy Scores rank consumers according to a likely bankruptcy loss ratio, which is bankruptcy losses divided by revenue. FICO describes its score as "an effective tool for retail cards, bankcards and other revolving accounts, as well as for installment loans, telecommunications/utilities accounts and other credit portfolios."
This is another example of how credit agencies gather, package, and distribute personal data that is then used to make judgments about the consumer. This bankruptcy score is used to decide whether to give you a loan and what your interest rate will be on that loan. Consumers should examine their credit reports to see what accounts need to be paid down.
Factors that translate into a high bankruptcy score for consumers are delinquent accounts, credit card balances that are close to the credit limit, and other large debts. The number of new credit accounts also draw attention as distressed borrowers typically try to find new lines of credit as they run out of money and options.
Lenders Act Sooner to Avoid Bankruptcy Losses Later
When a borrower declares bankruptcy, the lender may not be able to collect any of the outstanding debt. This is much costlier than a "charge-off," where the lender can still attempt to collect the loan or sell the outstanding debt to a collection agency. The lenders use the bankruptcy scores to possibly take early action against high-risk accounts. Lenders want to define and draw a line between the accounts that are too risky and those that look risky but could be very profitable. Risky lenders pay the highest interest rates and fees and lenders don't want to sacrifice this revenue.
Bankruptcy scores provide an early warning with pre-bankruptcy signs and lenders can step in and make changes to prevent losses before it is too late.
Am I a good candidate for bankruptcy?
Bankruptcy's Impact on Consumers
A bankruptcy is a very negative event on your credit report. It will pull down your credit score as long as the bankruptcy is listed on your credit report, usually seven to ten years.
The negative impact on your credit score varies, depending on what your score was before bankruptcy took place. If your score was already low, it may not have a substantial effect. On the other hand, a significant drop would likely occur if you had a good credit score. According to the New York Times, a bankruptcy can cut your FICO score by 130 to 240 points.
There are some things consumers can do to soften the effects of bankruptcy.
- Start building a good payment history by paying all bills on time.
- Check your credit report to make sure that only the accounts in the bankruptcy filing are reported with bankruptcy status.
- Re-establish credit as soon as possible. Start with a secured card and make your payments on time.
Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card.
Take the Next Step:
- Learn more about avoiding and filing bankruptcy in the TDS library.
- Have you decided not to do anything about your debts? Here's what the future has in store for you.
- Do you struggle to get ahead financially? Then you'll want to subscribe to our free weekly Surviving Tough Times newsletter aimed at helping you 'live better...for less'. Each issue features great ways to help you stretch your dollars and make the most of your resources. Subscribers get a copy of Are You Heading for Debt Trouble? A Simple Checklist And What You Can Do About It for FREE!
Share your thoughts about this article with the editor.
I often wonder if I should be seeking professional help to get my debt under control! Tell us: Yes, I'd like to find out if I am a good candidate for credit counseling or No, I don't think I need couseling but I would like to find out how I can pay off my credit cards more quickly.
More Debt Tips & Tools
- 6 smart strategies for paying off your credit cards
- 5 great second jobs to bring in extra cash
- Pay down debt now or save: Here's how to choose
- Can I get a debt consolidation loan with bad credit?
- What to do when you can't pay the ER bill
- Psychological issues could be costing you money
- How to stop overspending on your kids
- This week's Readers' Tips
- Reduce your debt with this free debt course by The Dollar Stretcher
- Am I a good candidate for credit counseling?
- Do I have a debt problem?
- Get free answers to legal questions
- Reduce your debt payoff time
- Calculate the real cost of your debt
- Reduce credit card debt calculator
- Debt pay-down calculator
- Calculate the true cost of paying just the minimum