Most of us are aware of the credit score – a numerical quantity widely used to assess your credit worthiness. But there’s another scoring tool that can debar you from getting credit. It’s the Bankruptcy Risk Score – a supplementary score that most creditors and lenders scrutinize prior to offering credit.
Personal bankruptcy seems to be a major consumer credit problem for lenders and credit providers. Since creditors cannot recover losses due to bankruptcy without litigation, so consumers filing bankruptcy are more costly for them. The year 2005 has experienced record number of bankruptcy filings – at least 31.6% higher than 2004 prior to the new law coming into effect.
But the new law has hardly helped debtors. Reports suggest that only 3.3% of the debtors could get rid off debts using debt management plans. The mandatory credit counseling sessions under the new law proved useful to only a maximum of 5% and minimum of 1%-2% of the filers. Here lies the need for Bankruptcy Risk Score to make debtors more aware of how much credit they can deal with. On the other hand, creditors and lenders get the extra edge over traditional scores, as they are better informed of the consumers’ credit status. This helps them in making credit decisions accordingly.
Creditors assess the score when you apply for a mortgage, a credit card or any other bank card. Before extending credit, banks may also review the score while checking your accounts. Banks need to maintain a standard capital-to-risk ratio, and Bankruptcy score enables them to evaluate the risk within their portfolio. A combination of your credit score and spending habits (how you use credit card, shopping card, etc) helps in the evaluation.
You may be looking for a single loan, either a mortgage or an auto loan. But multiple lenders may ask you for the credit report. In order to make up for this, while determining the Bankruptcy score, multiple auto or mortgage inquiries are taken as a single inquiry. Over applying for credit also matters a lot as far as this score is concerned.
Bankruptcy Risk Score Vs FICO Score
Unlike the FICO credit score that gives a general overview live skor of your credit history, the Bankruptcy Risk Score highlights your chances of getting bankrupt. The score varies from -200 to 2018, with the most ranging between 0 – 1000. Higher score indicates greater risk of filing bankruptcy. This is in contrast to the FICO scoring model where a low score implies there is higher risk in offering credit.
With Bankruptcy Risk Scores, creditors can:
- Supervise existing portfolios
- Decide upon the initial credit limit
- Raise or lower the existing credit limits.
- Determine the collateral requirements for mortgages and other secured loans.
- Identify lower and higher risk debtors and then offer loan programs as per their payment ability.
Bankruptcy scores are not available to consumers, only the creditors are informed about it by credit reporting agencies. However, the credit reporting agency, Experian has decided to provide consumers with such scores, knowing which consumers can anticipate debt problems and thus be more cautious. Experian has also compiled the following list of states with higher bankruptcy scores.