Credit is an integral part of today's economy. If you hope to be approved for a car loan. a home loan, you have to demonstrate that you're a good risk for the lender. But credit scores impact your life whether you're applying for credit or not. For instance, many rental agencies check credit reports before approving an application for an apartment. Your employment options may be impacted by your credit history, and your automobile insurance rates will typically be higher if your credit score is low.
You can significantly improve your credit score after filing for bankruptcy protection within a year or two, but making that improvement requires careful planning, and the first step is understanding and monitoring your credit report.
What is a Credit Score?
Your credit score is a three-digit number generally relied upon by lenders to determine how good (or bad) a credit risk you are. Traditional credit scores range from 300 to 850. Each of the three major credit bureaus, Experian, Equifax and TransUnion, calculates these scores a little differently, so the score that you receive from one credit bureau may not match one requested by a lender from another bureau.
To further complicate the understanding of credit scores, the three major credit bureaus recently joined forces to develop a new scoring system, known as the Vantage™ Credit Score. The Vantage™ score is calculated on an entirely different scale, with the highest potential score being 999.
This variation may make it difficult to know what a score means; when you talk with a lender, make sure you know which credit score the lender will be looking at.
Although the exact numbers will differ from agency to agency, and even the scale may differ if the Vantage™ score is used, the factors that determine your credit score are fairly consistent and predictable.
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How Credit Scores are Calculated
Again, the exact formula varies. However, the aspects of your credit history that weigh most heavily include:
- The percentage of available credit that you're using: lower is better
- Late payment history: even one late payment
in the past six months can significantly impact your score
- Age of accounts: those with long-standing accounts tend to have higher credit scores
- Collection items
Other factors impact your credit score as well. For instance, every time you apply for credit and a lender requests your credit report, your credit score drops slightly. Therefore, it's important to plan your credit applications carefully, rather than submitting several applications in hopes that one will work out.
Your credit score can be affected by items you might never think to consider, as well, like unpaid parking tickets. Many municipalities are now using private collection agencies to follow up on parking tickets, dog licensing fees, even unpaid library fines, and those items may show up as collection accounts on your credit report. If they do, it won't matter how small they are, and it won't help much to pay them off, so be diligent about keeping these obligations up to date.
Having a mix of credit in your history generally helps your credit score, so if you're working your way back from bankruptcy you'll want to establish yourself with different types of credit over time: a credit card, a bank loan, perhaps ultimately a car loan. Of course, it's important to make good choices about your lenders. Otherwise, unexpected fees and punitive interest rates could land you right back in a cycle of minimum payments (or even late payments), doing your credit score more harm than good.
Finding and Fixing Errors in Your Credit Score
The first thing you'll want to do is to order your credit report from each of the three major credit bureaus. You can get your credit report free once a year at the government web site www.annualcreditreport.com. but you'll have to pay for your credit score.
Review your credit report to make sure that none of the accounts that were discharged in your bankruptcy are still appearing as open, delinquent, or collection items. It is against the law for creditors to continue to report items that were discharged when filing bankruptcy. Once anything that shouldn't be on your credit report is cleaned up, you'll have a fresh starting point and can move on to step two: Rebuilding Your Credit: What to Avoid .