Your Credit Score

When considering bankruptcy and bankruptcy alternatives, one of the biggest questions people ask me is “what about my credit score?” and “How will bankruptcy help improve my credit score?”. Read on to learn about what a credit score is and how different bankruptcy alternatives will impact it.

What is a credit score?
The credit score is a number given to you by a company that rates you as a borrower. In other words, when you want to borrow money, for a car, house, or just a loan, the lender will look to your credit score to see how risky it is to lend you money. Three big companies that do this are Experian, Equifax and Transunion. Your credit score can be seen in a credit report from any or all of these companies.

A credit score is one of many factors that go into a lenders decision to lend money and what interest rate to give you. However, generally speaking it works like this:

If the credit score is low, (this is bad credit) it indicates that it is risky to lend you money. A lender will not give the loan, or the lender will give it at a very high interest rate.

If the score is high, (this is good credit) it indicates that it is NOT RISKY to lend you money, (because you have a good history of repaying all your loans on time). The lender will give you money at a low interest rate.

Most people can always get a loan. The question is: What interest rate will you pay? Getting a high-interest loan is usually a very bad idea. That is why having a good credit score is so valuable.

High credit score is good (700 and up is great). Low credit score is bad (below 500 is terrible).

So, how do the bankruptcy alternatives when it comes to credit score?

Bankruptcy Alternative Credit Score Comparison.
This Credit Score Comparison Chart illustrates the impact of different debt solutions on your credit score over a 36 month (three year) period.

There are three assumptions here.

  1. Though it is usually not the case, this chart compares what would happen to a credit score assuming you started four strategies on the first month you realized you could not pay your debts.
  2. It is assumed that the debtor in this example does his best to restore his credit.
  3. This chart assumes the debt negotiation candidate was able to settle his debts in 30 months (2.5 years). This is very optimistic.

Three Year Credit Score Comparison Chart (Who wins the race to excellent credit?)

  Month1 Month6 Month12 Month24 Month36
Debt Negotiation: good bad terrible terrible so so/ bad
Debt Consolidation: good bad bad bad so so
Bankruptcy: terrible so so decent good excellent
Doing Nothing: good so so terrible terrible terrible
Repaying on and off: so so so so so so so so so so