You’re probably familiar with your credit score, but what is a bankruptcy score? Judging by data from Google Trends, most people don’t even know there’s such a thing as a bankruptcy score. This is partly because banks and credit bureaus generally talk about these bankruptcy scores less than credit scores. Although all three credit bureaus disclose that they do offer some kind of bankruptcy score, all three bureaus have different names for their scores and none of the three disclose how they arrive at the score, much less allow an individual to access their own score. This is notably different from credit scores, prominently featured on the home pages all three credit bureaus.
What Is A Bankruptcy Score?
Bankruptcy scores are designed to tell lenders the likelihood of an individual filing bankruptcy within the near future. Bankruptcy scores are compiled by the same three credit bureaus that compile credit scores- Transunion, Equifax and Experian. The premise of bankruptcy scores is that by avoiding borrowers with a high risk of bankruptcy, lenders can more confidently loan money, thus keeping their rates more competitive.
Bankruptcy Score vs. Credit Score
Bankruptcy scores have a lot in common with credit scores. They both aim to evaluate borrowers’ risk. They both factor in information such as payment history, credit utilization, and new credit applications.
Bankruptcy scores and credit scores serve slightly different purposes, however. While credit scores indicated the general risk of a borrower, bankruptcy scores strictly indicate the likelihood of the borrower filing bankruptcy within a specified time frame- typically two or three years. Depending on the type and length of loan as well as the lender’s objectives, the lender may place more emphasis on one score or the other.
Credit scores and bankruptcy scores are also figured in very different ways. Credit scores typically use the FICO method, or a method very similar. How FICO scores are figured is public knowledge, impacted by payment history, credit utilization, age of credit, credit mix and new credit, in that order. Because credit scores all use the same model, credit scores all fall within similar ranges of roughly 300 to 850.
Unlike credit scores, bankruptcy scores widely vary from credit bureau to credit bureau. Equifax’s Bankruptcy Navigator Index, for example, ranges from 1-600, updated from former models which ranged from 1 to 300. Contrast this with Experian’s Bankruptcy PLUS, which gives the lender an option of a 1 to 1,400 range and a 300 to 900 range. Transuion’s CreditVision aims to mimic a traditional credit score by ranging from 300 to 850. Further complicating things, a high score may mean low risk or high risk, depending on the model.
How each model weighs information also differs. Transunion, for example, indicates that they look at balance trends- whether balances are going up or down, and by how much. They also take into account whether a consumer is making minimum payments or not, and whether they carry a balance on revolving debt such as credit cards. How much weight these factors carry, however, is not disclosed. Other bureaus are even more discreet regarding what information they use.
Why You Should Care About Your Bankruptcy Score
You might think that your bankruptcy score is so close to your credit score that you don’t really need to be paying attention to it. As long as you stay on top of your credit score, everything’s good, right? Perhaps not. Forbes outlines several reasons you might be denied a loan, even when you have good credit. Several of these reasons, such as the rapid accumulation of debt, are things that potentially have a huge effect on your bankruptcy score while still leaving you with excellent credit.
A borrower’s bankruptcy can be extremely costly for the lender. Often lenders lose all or most of the loan’s principal when a borrower files bankruptcy. Because of this, banks will readily turn down a loan if there appears to be a strong risk for future bankruptcy. So even if your credit is still excellent, if your bankruptcy score suggests that trouble lies ahead, there’s a good chance your loan will get denied.
What You Can Do About Your Bankruptcy Score
Although bureaus keep their bankruptcy scoring methods close to their chests, you can still take action to keep a good bankruptcy score. Because bankruptcy scores use much of the same information as credit scores, taking steps to improve your credit score will also result in a better bankruptcy score. Additionally, making extra payments or more than your minimum payment may indicate that you are not struggling to sustain your debt. Likewise, ensuring that your total debt burden does not rapidly increase will avoid any red flags on your bankruptcy score. Above all, use common sense to avoid taking on unmanageable debt loads. The credit bureaus have studied thousands of files to identify factors that indicate bankruptcy risk. The result is highly accurate scoring models. Rather than trying to fool the bankruptcy score, take steps to avoid bankruptcy.