Bankruptcy and Credit Scores

Just when you think you finally understand credit scores and how they're used for accessing your credit worthiness- have you heard about the other score that is used to prevent your ability to obtain credit?  Specifically, have you heard of the Bankruptcy Risk Score?  This score is a numerical score that many lenders and creditors use in conjunction with your credit score before they offer you credit, and has often become the reason why some people get denied lending.

The Bankruptcy Risk Score

Creditors use the Bankruptcy Risk Score whenever a consumer applies for a credit card, mortgage or other form of financing.  The risk score helps a bank evaluate how much "risk" is in their portfolio, as banks are required to keep a standard capital-to-risk ratio.  In addition to the Bankruptcy Risk Score, creditors use a combination of your credit score and how you've used your credit or shopping cards when evaluating you for financing. 

Comparison of the Bankruptcy Risk Score & The FICO Score

The FICO credit score is used as an overview of your credit history, predicting an individuals ability to repay their borrowed money based on a wide variety of factors that each have different weights in the formula for deriving the numerical score.  In comparison, the Bankruptcy Risk Score is a number that actually predicts your chances of becoming bankrupt.  While FICO scores range between 300 and 850, with higher scores implying that there is less risk for a lender offering credit; a Bankruptcy Risk Score varies from -200 to 2018, with highest scores indicating more risk in terms of the individual filing bankruptcy.  Most individuals have a BRS somewhere between 0 and 1000. 

It is impossible for an individual to have a very high credit score (indicating credit worthiness) while having a very high risk for filing bankruptcy.  The numbers work together.

How Creditors Use Bankruptcy Risk Scores

Creditors use the BRS to supervise their existing accounts- whether they want to raise or lower credit limits on the accounts they already have.  They can use a Bankruptcy Risk Score to decide how much credit to initially extend an individual, or to determine what type of collateral will be required for a mortgage or secured loan.  Additionally, BRS is used to identify varying levels of risk debtors, and to offer various programs for loan repayments based on that risk level.

Only one credit reporting agency currently provides access to consumer bankruptcy scores directly to the consumers- in an effort to help consumers anticipate debt situations for themselves and to be cautious.  Experian will provide consumers with the BRS, although typically creditors are the only ones who are regularly informed of individuals and their Bankruptcy Risk Scores.