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5 Factors That Affect How Credit Bureaus Calculate Credit Scores

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Finding yourself in a position of contemplating bankruptcy can bring up a lot of questions such as: How does a new bankruptcy affect my credit score vs. an old one? Some might be surprised to find out that in a number of cases, filing bankruptcy might actually improve your credit standing.

How a bankruptcy impacts a credit score involves multiple factors. Those with high credit scores may see a significant negative impact right away. But if you currently have a low credit score, the bankruptcy won’t hurt your score that badly, and in fact it could potentially make it easier for you to improve your score post-bankruptcy.

Here are some basic guidelines (in order of importance) to help illustrate how credit bureaus calculate a credit score:

1) Historical Factors – Credit history makes up about 35% of your total credit score and is the most important factor in calculating scores. Past long-term behavior is the best means to predict future long-term behavior.

2) Credit Utilization – The percentage of available credit used is the second most weighted factor in credit scoring. Maxing out credit cards or getting very close to credit limits brings credit scores down. Maintaining low credit card balances brings scores up. According to FICO, the best scores tend to have an average credit utilization of less than 6 percent, with three accounts carrying balances, and less than $3000 owed on revolving accounts.

3) Length of Credit History – The length of time each account has been open and the length of time since the account’s most recent action are the next elements that go into calculating credit scores. Because these are a factor, it is impossible to have a perfect credit score if you’re new to credit. But it doesn’t take long to bring the credit score up by beginning to use credit, and those with established credit should maintain their long-standing accounts.

4) New Credit – New credit is a factor that is taken into consideration when determining credit scores, but it doesn’t hold a lot of weight in the calculation. Opening multiple new credit lines won’t improve your score – in fact, doing so could be a red flag that you are in financial trouble, bringing your credit score down. Newer accounts also bring your average account age down, which will have a larger effect on your credit score if you don’t have a lot of other credit information. Opening a new credit account shows you are in a position to obtain new credit, but it is best to apply for and open new credit accounts only as needed.

5) Credit Mix – Repaying a variety of debt products such as loans, credit cards, mortgages, medical debts, student loans, cell phone and utility bills, shows you can handle all types of credit. A good rule of thumb is to have a solid mix of revolving credit and installment loans.

Maintain Those Better Scores

Filing bankruptcy can actually improve credit scores because your debt is discharged. Right after you get your discharge, you will have to take steps to maintain and/or rebuild your credit. You’ll get your chance to do so because credit card companies will offer you credit cards right away since they see you have no debt. Interest rates will be higher though, and some lenders may be more reluctant to extend credit because they need proof you can responsibly handle debt again.

Time is on Your Side

Having years behind you since a bankruptcy gives creditors more of an indication of your credit behavior and practices – your trustworthiness equals an extension of credit from them. While we’re on the subject of time, Chapter 13 remains on your credit report for 7 years while Chapter 7 remains on your credit report for 10 years. One of the best ways to improve credit score as a whole is by making consistent, timely payments.

The Takeaway

When you file bankruptcy and your debt is discharged, your credit score can actually improve because you don’t have any more debt reported. Assuming your credit score will automatically tank after you file bankruptcy can be a mistake – but imagine the pleasant surprise when you see your credit score actually go up after you file. Since most people filing bankruptcy are in a state of bad credit, filing for bankruptcy is more likely to improve their credit score. In any case, by taking the proper steps to rebuild your credit you may see excellent credit again within just a couple of years after filing.

For people struggling with debt, there are many options. If you are in this situation, the right option for you will depend on several factors. The advice of an experienced bankruptcy attorney can be invaluable in determining the best course to take. At the Law Office of Joel R. Spivack, we specifically focus on helping clients get through challenging financial times. If you need guidance and support for your unique situation, reach out to Attorney Joel Spivack today.

I will help you regain control of your financial situation. I offer a free, face-to-face consultation at our Cherry Hill, NJ office. I will provide you with honest answers to your questions and let you know what I can do to make the process go as smoothly as possible for your specific issues. You can reach me by phone at 856-488-1200 or you can also fill out my online contact form here.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.