If you have filed bankruptcy or are considering filing bankruptcy, one of the things that you have probably thought of is how it will affect your credit score. As I’ve mentioned before, a bankruptcy will stay on your credit report for 10 years. You should learn how to read and interpret your credit report and should take a look at it at least once a year.
I came across a helpful article that I wanted to share with my readers that gives some great insight into how credit scores are calculated. According to the article, this is how your score is determined:
¶ 35 percent is determined by your payment history. Do you regularly pay your bills or fines on time to any creditor that submits your information to the credit bureau? Even unpaid library fines, medical bills or parking tickets may appear here.
¶ 30 percent is based on the amounts you owe each of your creditors, and how that compares with the total credit available to you or the total loan amount you took out. If you’re maxing out your credit cards, your score may suffer.
¶ 15 percent is based on the length of your credit history, both how long you’ve had each account and how long it’s been since you had any activity on those accounts. The fewer and older the accounts, the better (assuming you’ve made timely payments).
¶ 10 percent is based on how many accounts you’ve recently opened compared with the total number of your accounts, as well as the number of recent inquiries on your report made by lenders to whom you’ve applied for credit. Your score can drop if it looks as if you’re seeking several new sources of credit — a sign that you may be in financial trouble. (If a lender initiates an inquiry about your credit report without your knowledge, though, it should not affect your score.) Shopping around for an auto loan or mortgage shouldn’t hurt, if you keep your search to six weeks or less. But every inquiry you trigger when you apply for a credit card can affect your score, says Craig Watts, a spokesman for Fair Isaac. So be selective.
¶ The final 10 percent is determined by the types of credit used. Having installment debt — like a mortgage, in which you pay a fixed amount each month — demonstrates that you can manage a large loan. But how you handle revolving debt, like credit cards, tends to carry more weight since it’s seen as more predictive of future behavior. (You can pay off the balance each month or just the minimum, for example, charge to the limit of your cards or rarely use them.)
The better your score, the better credit you’ll get, at lower interest rates. While a bankruptcy will stay on your credit report for 10 years, it is only one element of your overall credit score. Bankruptcy will give you a new start to help you increase your score.
You can read the article here.