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How is a credit score calculated?

Credit scores are often a concern for anyone considering filing bankruptcy. Bankruptcy does negatively impact your credit for a short time, but it can also help you in the long run. This is due in part to how credit scores are calculated.

Your credit score is calculated based on a proprietary formula that is only known by the credit bureaus. However, we do know many of the factors that lead to your score. For example, late payments negatively impact your score. A history of on-time payments positively impacts your score.

Other types of things that can drop your score include reports of foreclosures or judgments on your credit history, too many credit queries in a short amount of time, and a high balance on revolving credit card accounts. If your overall balances are at or near your credit lines, this can also reduce your score. For example, if you have $4,000 in total credit on two credit card accounts, but your balance is $3,900, then your score might be reduced.

All of the things that can reduce your credit score are common in the months leading up to a bankruptcy. This means that your credit score might already be suffering. When you file bankruptcy, you put a stop to any further collections activity. Your score will be impacted by the bankruptcy, but as you begin to resolve financial issues and build a foundation of new habits, your score will slowly go up.

It's important to note that credit is harder to come by in the five years or so following a bankruptcy, but it is not impossible to finance something like a car with all lenders. Understanding how bankruptcy will positively and negatively impact your credit is an important step in deciding whether you will file.

Source: Federal Trade Comission, "Credit Scores," accessed June 03, 2016

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