A New Score That Determines Your Financial Stability

Most consumers today are all too aware of the tremendous influence that their credit score can have in determining the interest rate they'll pay, their credit limits—even its affect on loan approvals. Credit scores simply look at our history of paying bills and inform lenders of what your historical payback patterns have been. No doubt, credit scores are certainly very powerful. But did you know that there is ANOTHER score that is currently being used to determine you financial stability?

Today, more and more banks and lending institutions are turning to another tool for measuring a consumer's financial stability—a Bankruptcy Risk Score. Simply put, a bankruptcy risk score is a score that indicates to a lender how likely you are to file for bankruptcy. This score is beginning to gain popularity among financial institutions across the country and is being used as a secondary means for assessing the financial integrity of potential customers. While a credit score essentially looks at your history of paying bills, a bankruptcy risk score looks at a candidate's overall financial profile in much more detail.

By and large, this score is used when applications for loans, refinancing, or increases in lines of credit are involved. So, why are some financial institutions focusing on this "risk score"? Some researchers believe that financial institutions are using the score for internal compliance and risk audits. Banks and other financial lending institutions are required by law to maintain a reserve of funds based on their potential bad debt losses. Banks may use bankruptcy risk scores as a risk rating in order to assess and report their susceptibility to risk in their loan portfolio and in order to safeguard against potential loss.

The bankruptcy risk score is attained using advanced mathematics and complex data analytics that weighs a person's ability to pay bills in a timely manner, determines how much credit is being used or what their potential is, and ascertains a consumer's credit habits and behaviors. While the variables used to calculate the bankruptcy risk score are similar to credit scores, a consumer is best served by presenting a high credit score and a low bankruptcy risk score when applying for a loan or line of credit.

Today, the bankruptcy risk score is becoming more and more important to both banks and to the consumer. What do you need to do to keep your bankruptcy risk score in check? It's the same as the actions needed to improve your credit score: pay your bills on time and apply for credit sparingly.

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