Why is Credit Important?

Generally, creditors will offer you better loan terms if they consider you to be less likely to default on a loan, and higher rates if they consider you to be more likely to default on a loan. If your credit is very bad, it may be difficult to obtain any sort of credit or loan.

Bankruptcy - Why Is Credit Important

Generally speaking, your credit represents your credit risk, or the likelihood of you defaulting on a loan. The information on your credit report and your credit score are often used to determine your credit risk, but lenders look at several other factors as well:

  • Income
    It is usually necessary that you demonstrate a verifiable way to repay a loan. Lenders will typically offer you better terms if you have a steady, verifiable income.
  • Liabilities
    Lenders will look at the total amount of outstanding financial obligations you have. Lenders will typically charge higher interest rates if you are financially overextended and having difficulty meeting your current obligations.
  • Assets
    Lenders will often try to determine what assets you own and their value. Creditors prefer to loan money to you if you have assets because they can be sold to repay the loan. Creditors may also be able to seize and liquidate the assets themselves if you default on the loan.
  • Public Record
    Lenders will inquire to see if you have had any previous bankruptcy filings or judgments filed against you. Although bankruptcy is a last resort, it is often considered more favorable than “bad debt” on your credit report.
  • Debt-to-Income Ratio
    Lenders will consider you to be less of a credit risk if you can demonstrate that you have a large amount of income in relation to your debts. $10,000 of debt for someone earning six figures is seen as less of a negative than it would be for someone earning the minimum wage.

Creditors usually prefer to lend money to people who have eliminated all of their unsecured debts in a bankruptcy. If your credit is especially bad, filing for bankruptcy may actually help your credit. Creditors usually prefer to lend money to people who have eliminated all of their unsecured debts in a bankruptcy. Your credit report after a bankruptcy shows that the amount of debt owed to all previous creditors (“also referred to as “discharged creditors”) is zero. That fact, coupled with the fact that creditors know that a person who obtained a discharge of debt in a Chapter 7 bankruptcy cannot file another Chapter 7 bankruptcy for at least eight years following that discharge, can make an individual who has filed for bankruptcy a more attractive potential borrower than a potential borrower with a lot of unsecured debt.

Although lenders are looking at your credit history when they assess how much of a credit risk you are, they are actually much more concerned about your credit future. Lenders are more concerned with evaluating the likelihood that you will default on future loans, not your past credit problems. Most people’s financial futures are much brighter once they eliminate their debts in a bankruptcy, and creditors view them as less risky than somebody with unmanageable debts. If you have bad credit, a bankruptcy may be the first step towards improving your credit. You can’t properly begin to rebuild your credit until you have taken care of your bad debts, otherwise those debts will continue to drag your credit down.

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Understanding  Your Credit