Understanding Debt and Bankruptcy: Credit Score Components

Understanding Debt and Bankruptcy: Credit Score Components

When used correctly, credit cards and loans can be useful and fun. But if used unwisely, they can get out of hand very quickly; ruining your credit and possibly leading to bankruptcy. Understanding these 6 essential credit score components can help you understand your credit score.

1 - Payment History

Payment history is the most important component of a credit score. Creditors look at your payment history to evaluate your reliability as a borrower. Making on-time payments shows creditors that you will pay back what you've borrowed. Surprisingly, payment history quickly declines to poor with only a 97% payment history.

2 - Credit Card Utilization

Another high-impact category is credit utilization. Credit card usage is displayed as a percentage of your credit card balance over available credit. High credit usage indicates poor financial control. Basically, the higher the percentage, the more likely creditors will see you as a risk.

3 - Derogatory Marks

The final high-impact category is derogatory marks. Derogatory marks are given when accounts go to collections, liens, or bankruptcies. These events are seen negatively because creditors only want people who will consistently make payments. Do your best to avoid derogatory marks because they can stay on your record for 7 years or longer.

4 - Age of Credit

Age of credit, the average time of open accounts, has a medium impact and is calculated by dividing the sum of how long all accounts have been open by the number of open accounts. Opening too many accounts at once implies you can't live within your budget.

5 - Total Accounts

The total number of accounts indicates credit worthiness to lenders. However the number of accounts has a very low impact and the age of your credit is more important. Having no or only a few accounts can also be seen negatively.

6 - Credit Inquiries

The number of credit inquiries has a low impact on your score. However, multiple inquiries may imply that you struggle financially. Furthermore, a credit inquiry only counts if it is a hard inquiry, which only occur when you are attempting to open a new account. Simply checking your credit score, a soft inquiry, will not affect your score. Inquiries remain on your report for 3 years.

Having good credit can feel like a daunting task, especially when contemplating bankruptcy. However, a good law firm can assist people with all probate matters. The Law Offices of James C. Shaw are compassionate and knowledgeable professionals who can help people who cannot pay their debts.

Attorney James C. Shields received his J.D. from Loyola Law School in 1985 and an M.B.A. in Finance from the University of California, Los Angeles in 1975. Attorney Shields also earned a B.A in Economics from California State University Dominguez Hills in 1973. He previously worked as an attorney at the Law Offices of Robert G. Winterbotham, and in 1998, he started his own law firm to emphasize on the practice areas of bankruptcy, wills and probate, estate planning and conservatorship, and traffic cases.

James C. Shields is a member of the State Bar of California, the State Bar of Arizona, and the State Bar of Oregon. He is also a longtime member of the American Bar Association, the National Association of Consumer Bankruptcy Attorneys, and the Los Angeles County Bar Association.