What Makes Up Your Credit Score? - Westgate Law

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What Makes Up Your Credit Score?

bankruptcy, southern california bankruptcy, filing bankruptcy, dealing with debt, westgate law, bankruptcy attorney, bankruptcy lawyer, southern california bankruptcy attorney, southern california bankruptcy lawyer, rebuild credit after bankruptcy, credit score, perfect credit after bankruptcyIt’s one thing to decide that you are going to rebuild your credit score after bankruptcy, but it’s another thing to do it – particularly when you aren’t sure where credit scores come from. What makes up your credit score?

  • Payment History (35%)
  • Outstanding Debt (30%)
  • Age of Your Credit (15%)
  • Type of Credit (10%)
  • Credit Inquiries (10%)

Payment History is your first step toward improving your credit score. Every six months you complete of positive payments will move your score upward. You want to make a payment every month. Even if all you do is purchase a piece of pizza with your credit card, the future payment for that “piece of pizza” will show that you are reestablishing a positive payment history.

Outstanding Debt will only be applicable for those who recently received their bankruptcy discharge if they reaffirmed a mortgage loan or an auto loan. Once you receive post-bankruptcy credit, do not intentionally carry a balance just to prove that you can manage a balance. Many have been told that carrying a balance on a car will improve their credit score. This is a myth. Intentionally carrying a balance will leave you paying interest – not improving your score. You do not need to carry a balance from month to month in order to improve your credit score. In fact, you should aim to keep your balance to credit ratio as low as possible. Having $1,000 of available credit on a $1,000 credit card is actually good for your credit. Having $1,000 of available credit left on a $10,000 card is not good for your credit. The first scenario shows you have a 0% balance-to-credit ratio while the second scenario shows you have a 90% ratio. The lower the ratio you keep over a longer period of time, the better your credit score.

Since the age of your credit is taken into account in the calculation of your credit score, you will want to open up new, post-bankruptcy credit accounts as soon as possible after receiving your discharge and keep them open for the foreseeable future. You may obtain credit with terms that you are not happy with, annual fees or poor customer service, but regardless, the older the account the better. There are exceptions to this rule. If you end up with a card that carries a hefty annual fee, don’t pay it simply to keep the card. It’s a process. As soon as you are able to establish and maintain credit with reputable companies, the sooner your credit score will recover.

You also need to consider the type of credit you are obtaining. You should aim for 3-5 credit cards. Avoid deferred payment loans (a.k.a. “buy now, pay later loans” or “6 months interest free credit”). Save these for when you have recovered your credit. This type of loan can hurt your credit in two different ways: 1) a high balance to credit ratio (while you enjoy the 6 months no interest you are carrying the full balance) and 2) future lenders may wonder why you couldn’t start making payments on that loan right away and assume you are starting to take on too much debt again. If possible, obtain a mortgage or auto loan, as they will have the most positive effect on your credit score.

If you have too many credit inquiries it can negatively affect your credit score. This is important and you don’t want just anyone to run your credit for just any old credit account opportunity (particularly if you know that it’s going to be declined), but don’t be overzealous either. Avoiding inquiries entirely would mean never having any new credit. It would also mean that you never see your own credit report. And that would be counterproductive to the overall goal as knowing what your report looks like before applying for credit will allow you to get the most out of any possible credit inquiry when the time comes. Just make sure that you are running the show on who is pulling your credit report, when it’s being pulled and why it’s being pulled.

To find out more about repairing your credit post-bankruptcy and what constitutes a credit score, check back on the Westgate Law blog soon or get in touch with an experienced southern California bankruptcy lawyer today.

About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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