Lenders have been using a person’s credit report for years to judge their overall creditworthiness and the risk that they might default and become a bad debt. However, financial institutions often use another measure, a bankruptcy score, to refuse a loan application for someone who may otherwise have good credit.
It’s not unusual for me to meet with individuals in financial distress who have a good credit score. This is because someone who relies heavily on credit to make ends meet works very hard to ensure that they never miss a payment and that there is no history of delinquency on their credit report. Consumer data shows that borrowers who have a high risk of filing bankruptcy behave differently than a typical borrower with bad credit. They use their credit more often, have frequent credit applications, have a higher credit utilization rate, have more new accounts — and yet, fewer accounts in collection.
Credit bureaus, because they have access to massive amounts of data on our credit behavior, have used this information to provide lenders with a measurement of the likelihood that you may file bankruptcy — your bankruptcy score. This score is made available to lenders when you agree to allow them to check your credit report. Equifax has what they call the Bankruptcy Navigator Index, and TransUnion has created a CreditVision Bankruptcy Score.
The problem is that although lenders have access to this measurement, consumers typically do not. While you can purchase your credit score through one of Canada’s credit bureaus, there is no way to purchase your bankruptcy score. In fact, most people do not even know that such a score exists. However, it may be the reason why you have been turned down for a loan, despite having a good credit score.
I recommend that you focus on building a healthy debt profile, rather than focusing on your credit score. This means keeping balances well within the reasonable range in terms of your income and well below your credit limit. Limit the number of loans, especially credit cards, you carry and use appropriate forms of loans for their purpose.
Have a plan to pay them down and follow that plan. And if you carry more debt than you can repay, stop focusing on your credit score as the main issue. Remember, a credit score is for the bank’s benefit when making lending decisions, not yours.
If you have excessive debt, you will probably be turned down for credit eventually, and the only way to rebuild your credit may be to clear the decks first, even if that means filing bankruptcy or a consumer proposal.
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