If you are contemplating a personal bankruptcy, you’ve likely heard that you need to consider the effect such a move will have on your credit score. You are no doubt aware that your credit score can affect many aspects of your life – it can either help you greatly, or disadvantage your ability to get what you need.
A credit score informs lenders about how credit worthy you are – that is, based on your history, how likely you are to pay back the loan or debt in question. This creditworthiness is calculated utilizing the data from your credit reports. The resulting FICO® Scores are used by 90% of top lenders to make decisions about loan approvals.
Credit scores typically dictate the amount of credit that an individual can have extended to them, and will influence interest rate and other terms that are offered by a lender. In other words, credit scores are an essential part of your financial health.
When you submit an application for a credit card or a mortgage, lenders want to understand their risk in lending you the money. When lenders request a credit report in order to process an application, they also ask for a credit score based on the report. A credit score represents a summary of individual credit risk, based on a snapshot of a credit report at a chosen moment in time.
About Your Scores
The most commonly utilized credit scores are known as FICO Scores, which are produced by Fair Isaac Corporation. The vast majority of lenders use FICO Scores to assist with billions of credit decisions – approvals and denials – annually. FICO Scores are figured out based on information from three credit bureaus – Experian, Equifax and TransUnion. By comparing this data to the patterns in hundreds of thousands of past credit reports and transactions, FICO Scores determine your likely level of future credit risk.
What Constitutes a “Good” Credit Score?
Most credit scores are based on a range of 300-850. The higher your credit score, the lower your risk to the lenders contemplating lending you money. A “good” credit score is considered by most credit companies to be between 670-739.
A score of less than 580 is considered to represent a significant credit risk to lenders. A score of 580-669 is considered a fair score, and although under the average credit score for most Americans, some lenders will assume that risk.
A score of 670-739 is average or above average and is considered a good credit score. A score of 740 and above is an excellent score and represents an attractive credit consumer for lenders. A credit score of 799 or above is exceptional.
Lenders use credit scores to assist them in lending decisions. Each lender has its own rules and a differing level of acceptable risk. There is no final “cutoff score” acknowledged by lenders as a whole, and each will apply additional factors to their individual decisions.
When a credit score is reported, the credit bureau will also provide up to five factors that most influenced the calculation of the score. The points they make to justify their decision and the score are typically negative, outlining the reasons the credit score isn’t higher.
How the Bankruptcy Affects Your Credit Score
A bankruptcy is one of the more significant events as it relates to your credit score. A good credit score can slide over 200 points, and a mediocre credit score can fall between 100 and 150 points. This is why people are cautioned to not take bankruptcy lightly, but to seriously consider all the options.
Still bankruptcy is a godsend for many who have no way out of their debt nightmare. Let’s face it, if you cannot pay your bills, your credit score is being more negatively impacted by the day anyway. Personal bankruptcy, when filed with the help of an expert bankruptcy attorney, can clean the slate and allow you to move forward. The sooner you can begin to repair your credit score, the sooner you can get back on your feet.
If you have questions or would like to discuss your options further, call Richard V. Ellis, Sarasota bankruptcy attorney.
