Vol 6 No. 24 - March 8, 2006

Improving your bankruptcy risk score
By Louise Bolger
SUN STAFF WRITER

It couldn’t have been too long after man discovered fire that he created the concept of credit.

Think about it. The more successful hunters and gatherers would give some of their bounty to the less successful as insurance against the day when they couldn’t procure their own food. If the loan wasn’t paid off, with interest, good-bye future credit.

Modern credit policies aren’t too different. Financial institutions have a variety of methods to determine if you are a good credit risk, and one of them that has been around for a long time is just starting to become known to the average borrower.

You probably already know what your credit score is, and if you don’t, you should because this is the number that helps you get credit and good interest rates on mortgages, car loans and credit cards. Well, there’s another scoring tool called the bankruptcy risk score.
This score is used secondarily to the credit score when financial institutions analyze a consumer’s credit history. It is actually more of a debt analysis than a credit rating or score used to determine the risk of bankruptcy. It is arrived at by use of advanced mathematics and data analysis partly based on consumer spending and types of charges, as well as information directly from your credit report.

Since banks and lending institutions are required by law to keep a reserve based on potential bad debt losses, the bankruptcy risk score was developed to help banks assess true risk within their portfolios.

Unlike credit scores where the higher number the better, bankruptcy risk scores start in the negative numbers and can increase as high as 2,000. So far bankruptcy risk scores have been difficult to get, but they may be made available in the future through some of the traditional credit report agencies.

In the meantime, just like keeping a clean and healthy credit rating and high credit score, working on a good bankruptcy risk score is important. In fact, many of the same ways of improving credit scores will also improve bankruptcy scores:

Pay all your bills on time. Even late payments count against you. Try using automated payments if you’re the forgetful type. Keep debt balances low and stay away from reaching the top of your credit card limit. Open accounts only when necessary, and don’t apply for unnecessary credit. Say no thank you to the nice lady offering a new department store credit card when you’re buying lipstick.

Statically, someone who has applied for credit six or more times in a 12-month period, is more likely to have problems repaying creditors, and is eight times more likely to file for bankruptcy. If, however, you are shopping for a home loan or car loan and apply to multiple lenders, the bankruptcy risk score counts it as just one inquiry. And, finally, if you have recently paid off a credit card, wait before closing the account. Long credit histories help lenders decide whether they want to do business with you.

There’s no question that today’s world revolves around the use of credit, therefore, improving your bankruptcy risk score could have significant financial benefits.

Even though, my little scenario about early man may be a bit of a stretch, it’s still survival of the fittest when it comes to finance, a good reason to keep all your credit scores fit.

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