Before bankruptcy, a miserable credit score was no surprise. My client reported a 498 credit score before he filed.
What was surprising is that, three month after he filed bankruptcy, his score was 614!
That’s a 116 point increase in his score in three months.
That’s while his bankruptcy case is still active, and long before he gets a Chapter 13 discharge.
So let’s hear no more about bankruptcy always trashing your credit score.
More importantly, let’s stop focusing on credit scores as a measure of financial well being. After all, a credit score only claims to measure the liklihood of your paying back more debt.
Instead, focus on the health of your balance sheet. And enjoy the peace that comes with reduced debts.
What credit scores measure
Credit scores are supposed to measure the likelihood that a borrower will repay future credit. Makes sense that lenders would want to measure that.
But credit scores are based on information found in credit reports. And credit reports are notoriously inaccurate. Twenty five percent of credit reports contain material errors, according to government studies.
Isn’t it ironic that the oh-so-precise number in your credit score is based on bad information? As we say in number-obsessed Silicon Valley: garbage in, garbage out.
Misuse of credit scores
As if inaccuracy isn’t bad enough, credit scores are increasingly used for issues far removed from the extension of credit. Auto insurance rates, utility service, employers and even immigration decisions are influenced by credit scores.
So questionable information from credit reports invades your life far beyond issues of consumer credit.
And, even worse, in my view, is the commercial exploitation for profit of consumer’s focus on credit scoring.
Credit anxiety is profitable
The widening use of credit scores outside of finance created a entire industry of supplying credit scores, weekly or monthly, to consumers.
Originally credit scores were used by lenders, internally. But these days, credit card companies, personal finance sites, and even my credit union, try to sell you access to your credit score.
And by the time they’ve convinced the public that their credit score is as vital a measure as blood pressure or body-mass index, lenders and debt collectors can use that belief to demonize bankruptcy.
But, as my client’s experience shows, it just isn’t so. (And a national study says credit scores trend immediately upward after bankruptcy.)