Many of the potential new clients who come to see me are concerned about their credit scores, and how bankruptcy will affect their credit. So I thought I’d write you all a little bit about how your credit scores are computed.
As you can imagine, almost every client I have seen as a bankruptcy attorney in Utah has come to me with an absolutely trashed credit score. So, I’d like to first dispel a misconception about the effect of bankruptcy on your credit score. It is true that a bankruptcy will stay on your credit report for 10 years, and it is also true that filing bankruptcy will negatively impact your score (surprise, right?). But here’s something you should think about: if your score is already trashed, filing bankruptcy isn’t going to cause it to go down further. In fact, filing a chapter 7 bankruptcy will often give your credit score a small boost!
It is also true that because your bankruptcy filing will stay on your credit report for 10 years, it will continue to negatively affect your score. But here is something else you should consider: in the meantime, you can slowly rebuild your score with the responsible use of credit. Imagine you have a large amount of debt, you cannot keep up with your monthly payments, and you find yourself falling farther and farther behind. You know you need to do something and you have considered bankruptcy, but are worried about the effect it will have on your credit. Your options, then, are:
- continue to struggle and get farther and farther behind until, at some unknown point in the future your financial situation changes for the better and you are able to start catching up again. Everyone hopes that they will find a great paying job tomorrow, or that a distant relative will die and leave them a fortune, or that they will win the lottery. But these hopes are generally unrealistic for many reasons, not the least of which is that there is no lottery in Utah! So, if you try to do this, your credit will continue to get worse and worse over the next several years before things improve to the point where you can take care of your debt, and only THEN can you begin to rebuild your credit.
- you can file bankruptcy now, and start over! Your score will be affected for the next decade, but in the meantime you can get your financial freedom back and start to repair that credit. By the time the ten years is up your credit could be great, and will almost certainly be better at that point than it would have been if you chose option 1.
Ok, so now I’ll get off of my soap box and talk a little bit about how credit scores are computed. The first thing you should do, if you haven’t this year, is get your free annual credit report on the internet. You are entitled to one completely free credit report each year – and I’m not talking about the freecreditreport.com commercials with the signing hipsters. Those companies will give you a free credit report (and score) if you sign up for their junky monthly credit maintenance crap that you don’t need. You do not have to go through that hassle, instead go to the government sponsored credit report website: annualcreditreport.com. Note: you cannot get your credit SCORE, just your report. But here’s the thing, seeing if there’s anything negative on your credit report, and getting an honest picture of your finances is what is important. In fact, did you know that the “score” that you get from these free credit report.com places is actually NOT the score that creditors look at when they are considering lending you money. It is only a guess at what that score might be!
How your Credit score is computed:
A credit score above a 700 is considered to be a “good” score. The maximum score is 850, and people that come to see a bankruptcy attorney in Salt Lake generally have a score below 550. Of course, that doesn’t mean that you should wait until your score gets that low before talking to a bankruptcy lawyer! If you are having financial trouble the best time to get some legal advice about bankruptcy is right now-before things get worse.
As far as computing the score, people think that the most important part is paying your bills on time. In truth, having a perfect payment history is very important, but it isn’t really that much more important than another very important factor on your credit report: the percentage credit you are using and the number of credit accounts that are maxed out. You want to keep this percentage low, and you don’t want any of your credit cards maxed out. You are doing good if you are using less than 15% of your total credit on revolving credit accounts.
Some other things that affect your credit are:
- the age of your credit accounts: the longer you’ve had a credit account open, the better it looks. Conversely, it can negatively affect your score if you have closed credit accounts.
- the number of credit inquiries you have on your report. An inquiry comes from creditors looking at your credit report when you apply for credit. The less you have the better – when you have too many credit inquiries, it will look to creditors as though you are out spending your income.
- “Public Records”: you don’t want to have any public records on your report – things like bankruptcy filings are public records, but so are collections law suits – so if you are going to get some collections suits filed against you – you may be better of declaring bankruptcy.
- The type of loans you have. Your credit score is affected by the types of debt you have – Mortgages, car loans or leases, personal installment loans, student loans, and credit cards all affect your credit differently. The people with the best scores have an even mix of these types of debt and have long positive payment histories – especially with mortgages.