A “credit score” is a numerical grade that is used by lenders to determine your creditworthiness. The three major credit bureaus are TransUnion, Equifax and Experian. Your credit score is important because it will be a major factor in determining the interest rate you qualify for, and the amount of credit you can obtain for major purchases such as your vehicle or home. A credit score is also used to determine your eligibility for credit cards and other unsecured loans. While specific scoring models may vary, the most commonly used credit scoring model in the United States is the FICO score. Here's a general overview of how a FICO credit score is calculated:
Payment History (35% of the score): Your payment history is one of the most significant factors in your credit score. It includes your track record of making payments on time for credit cards, loans, mortgages, and other debts. Late payments, missed payments, and accounts in collections can negatively impact your score.
Amounts Owed (30% of the score): This factor considers your credit utilization ratio, which is the amount of credit you've used compared to your available credit limit. High credit card balances relative to your credit limit can lower your score. Having a mix of different types of credit, such as credit cards and installment loans, can positively affect this category if managed responsibly.
Length of Credit History (15% of the score): The length of time you've had credit accounts is another factor. Longer credit histories tend to be viewed more favorably, assuming you've managed your credit responsibly.
Credit Mix (10% of the score): This factor considers the variety of credit accounts you have, such as credit cards, mortgages, auto loans, and personal loans. A diverse mix of credit types can have a positive impact on your score.
New Credit (10% of the score): Opening multiple new credit accounts in a short period can raise concerns about your credit risk. Each credit inquiry (hard inquiry) by a lender can temporarily lower your score.
It's important to note that your credit score is based on the information in your credit report, which is maintained by the three major credit bureaus in the United States: Equifax, Experian, and TransUnion. You're entitled to a free copy of your credit report from each bureau once a year, which you can obtain through AnnualCreditReport.com.
Different credit scoring models may have slight variations in their calculations, but the general principles mentioned above apply to most scoring systems. Your credit score can vary between scoring models, so it's a good idea to monitor your credit reports and scores regularly to ensure accuracy and take steps to improve your creditworthiness if necessary.
Bankruptcy Discharge: A bankruptcy Discharge Order will positively affect your credit score. The Discharge Order terminates your legal obligation to pay any remaining balance of principal and interest on contracts you have signed with lenders. Both the payment history and amounts owed (65% of your credit score) are reset to zero, so that you will truly have a fresh opportunity to rebuild your credit post discharge. Certain debts that are not legally discharged, or debts in Chapter 7 that were reaffirmed, will continue to be reported on your credit report because you will remain liable for these types of debts.
It is important to discuss these issues with an attorney who is experienced with bankruptcy and debtor-creditor issues.