Understanding Your Credit Score

Your credit score is a numerical summary of the information on your credit report. Creditors use this number to evaluate the information on your credit report and determine your credit risk. Your credit score typically ranges from 300-850. A credit score of 850 is considered perfect credit, and a score of 300 is considered an indication of someone who is a very large credit risk.

Bankruptcy - Understanding Your Credit Score 1

For a small fee, you can visit www.annualcreditreport.com and obtain your credit scores from each of the three major credit bureaus.

Five major factors determine your credit score:

  1. Payment History
    A history of timely and regular repayment to lenders according to the terms of your agreements with those lenders helps your credit score. Your payment history accounts for approximately 35% of your credit score.
  2. Outstanding Debt
    It hurts your credit score if your debts represent a large percentage of your available credit. “Maxing out” your credit limits indicates that you are already financially stretched, and lenders may be reluctant to extend additional credit. Try to keep all of your credit balances below 50% of your available credit. Outstanding debt accounts for approximately 30% of your credit score.
  3. If you are considering bankruptcy, there is a good chance that your credit score is already low, but it is also possible to have a great credit score and still need to file bankruptcy.Length of Credit History
    Well-established accounts with a long payment history will improve your credit score. If you used a certain credit account for a long period, it gives the creditors a better idea of your credit risk, and lenders look on you favorably if you have been able to maintain an account over a period of several years. The length of your credit history accounts for approximately 15% of your credit score.
  4. Recent Inquiries
    Multiple recent inquiries on your credit report will have a negative impact on your credit score. Lenders are afraid that multiple credit inquiries indicate that you may be applying for large amounts of new credit with several lenders at the same time you are applying for credit with them, making you a greater credit risk. Consideration of the number of recent inquiries regarding your credit accounts for approximately 10% of your credit score.
  5. Types of Credit Used
    Having a well-balanced variety of loans on your credit report will improve your credit score. Lenders will look favorably on you if you are able to demonstrate the ability to manage several types of loans and accounts successfully, especially mortgages and automobile loans. Consideration of the types of credit you use accounts for approximately 10% of your credit.

If you are considering bankruptcy, there is a good chance that your credit score is already low, but it is also possible to have a great credit score and still need to file bankruptcy. Often, it is those people that diligently manage their accounts over a long period of time that end up accumulating the most debt. The higher their credit score, the more credit they are given and the more debt they accumulate as they use up that credit. Using one credit card to pay another each month – “robbing Peter to pay Paul” -- or making large balance transfers without actually paying off the balance transferred can start a vicious cycle that quickly results in large debts.

Although filing bankruptcy lowers your credit score initially, eliminating bad debts gives you the opportunity to start rebuilding your credit score. Sometimes you have to take a step back in order to take two steps forward, and bankruptcy may be the best option for you. You would prefer a lower credit score with no debt to a good credit score with unmanageable debts.

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Understanding  Your Credit