Every adult in Canada has a credit file, regardless of whether you currently have any credit or not.
When you apply for credit, such as a loan, companies will check your credit file to determine whether or not you are perceived as a low-risk applicant.
The better your credit rating is, the more likely you are to be able to obtain credit.
Most people are familiar with the concept of credit files and credit ratings, even if they are unsure how exactly the system works.
But did you know you have a bankruptcy score?
Companies use bankruptcy scores to assess whether you pose a potential bankruptcy risk, even if you’ve never filed for bankruptcy or used formal debt solutions.
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Why Do Companies Use Bankruptcy Scores?
When an individual files for bankruptcy, their secured debts are discharged, and they no longer have to pay them back.
Similarly, if an individual makes a consumer proposal, creditors may only get a small percentage of what they’re owed.
As lenders stand to lose a lot of money if debtors file for bankruptcy or make a consumer proposal, they prefer to lend to people who are less likely to file for bankruptcy or make a consumer proposal in the future.
One way to assess this is to run a credit check and obtain a person’s credit score.
Your credit file contains information relating to whether you’ve paid your debts or if you’ve missed payments, as well as how much credit you currently have.
This data is used to calculate a credit score.
By assessing your credit score, companies can determine whether you pose a high or low risk and make a decision whether to lend to you on this basis.
However, there are times when someone might have a relatively good credit score but still pose a high bankruptcy risk.
By using a bankruptcy score, as well as a credit score, companies can identify these individuals and choose not to lend to them, thus protecting their own interests.
What Makes You a High Bankruptcy Risk?
Credit reference agencies use various data to calculate your score.
An individual who is a high bankruptcy risk and, therefore, has a high score, is typically someone who:
- Uses credit more often.
- Applies for credit more frequently than is average.
- Has fewer accounts in collection.
- Has more new accounts.
- Has a high rate of credit utilization.
If you are deemed to be a high bankruptcy risk, you will probably have a more active credit history than most other individuals.
You may have attempted to obtain credit more often and rely on credit regularly, for example.
Due to the new credit risk analysis algorithms used by credit reference agencies, you could be deemed a high bankruptcy risk even if you’ve never been turned down for credit or you’ve never missed a payment on your credit accounts.
What Impact Does a High Score Have?
If your score is high, it means that potential lenders will see you as a high-risk debtor.
Due to this, they may decide not to offer you credit, even if you have a high credit score or an unblemished credit file.
Alternatively, the potential lender may offer you credit but at an increased interest rate.
By charging you a high interest rate, lenders can try to offset the risk posed by you potentially filing for bankruptcy in the future.
Of course, neither of these consequences is good for the individual.
Essentially, having a high score will make it harder for you to obtain credit and, when you can access credit, it’s likely to be at a much higher interest rate than average.
Should You File for Bankruptcy if You Have a High Score?
Having a high score doesn’t necessarily mean you should file for bankruptcy.
However, a high bankruptcy score is generally seen as a warning sign of debt problems, so you may need to consider your financial situation.
In some cases, the impact of having a high bankruptcy score may encourage people to file for bankruptcy sooner than they would have.
For example, having a high score may prevent you from getting credit or mean that you can only access credit that’s designed for ex-bankrupts or people with poor credit histories.
In many ways, you’re already paying the price for not managing your debt, even though you may have been making the required repayments.
Many people are reluctant to file for bankruptcy or make a consumer proposal because they believe it will have a negative impact on their credit score.
Indeed, formal insolvency proceedings will certainly have an impact on your credit file.
However, having a good credit score but a high score means that you will struggle to obtain credit anyway.
Furthermore, only being able to access high interest credit accounts isn’t a viable way to reduce your score and reduce your risk level in the eyes of lenders.
By filing for bankruptcy or making a consumer proposal, you could potentially resolve your escalating debt problems before they worsen.
Although your credit file will be impacted for some time, it is possible to rebuild your credit rating following insolvency.
In many cases, it’s actually easier to rebuild your credit score after bankruptcy or a consumer proposal than it is after struggling for years to resolve your debt problems alone.
Talk to a Bankruptcy Trustee Today
If you’re concerned that you have a high bankruptcy score or you want to find out more about the debt solutions that are available to you, it’s important to talk to a licensed insolvency trustee (LIT).
A licensed insolvency trustee, or ‘bankruptcy trustee’, is a regulated professional who routinely deals with bankruptcies and consumer proposals.
In addition to this, trustees can provide guidance and information regarding various other types of debt solutions.
To find out more now or to discuss your situation in more detail, talk to a trustee at Bankruptcy Canada on (877) 879-4770.
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