March 2006:
The Bankruptcy Risk Score: What You Need to Know
Just when you became credit score savvy, along comes another number to know about: the bankruptcy risk score. Compiled by credit bureaus specifically for lenders to make informed business decisions, it is used to predict the likelihood of late payments, charge-offs, and of course bankruptcy.
How lenders use them
Naturally a lender wants to avoid loss, and the bankruptcy risk score aids in their quest to make constantly accurate evaluations. With it, they can pinpoint consumers who’ve had credit problems in the past but who are good risks today, as well as those who may on the surface seem credit-worthy but actually aren’t.
Lenders use these scores to not just accept or reject credit and loan requests, but to set credit limits and interest rates, and decide collateral requirements for secured loans. They are also used to monitor existing accounts so lenders can raise or lower credit limits and interest rates accordingly.
How the score is calculated
Be aware that for some bankruptcy risk scoring models, higher numbers indicate a greater likelihood of default (with scores ranging from – 200 to 2018). Others follow the more traditional system of lower scores indicating an increased level of default risk.
The calculation method is not public information, but basically it compares your credit report data (with close attention paid to spending and payment patterns) to your credit score, and factors in regional and economic variables. Each characteristic is assigned a point value, the sum of which is your score.
To get the lowest score
At this time consumers cannot check their own bankruptcy risk score. However, since much of it comes from information found on your credit reports (Experian, Equifax, and TransUnion), make sure they are absolutely accurate. Not only should you check all three reports annually, do so long before applying for a loan or line of credit.
If there is correct but negative information on your reports, you can reduce your bankruptcy risk score by proving you are a good credit risk. You can do this by:
- Deleting consumer debt
- Paying on time, every time
- Only applying for the credit you need
- Establishing a long history of using a variety of credit instruments responsibly
Sound familiar? It should. It’s the same way you can improve your credit score!
