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You probably already know about your credit score.
That's the number that helped increase your credit card limit or
perhaps prevented you from purchasing your dream car. Well there's
another influential scoring tool you should know about: It's called
the bankruptcy risk score.
According to financial experts, this score is used
secondarily to the credit score when financial institutions scrutinize
a consumer's credit history.
Kept tucked away from consumers for nearly 20 years,
this number differs from the credit risk score, because it's a little
more specific. It measures how likely a person is to file for bankruptcy.
It is used by credit reporting agencies and geared
specifically to lenders.
Researchers say the score typically surfaces when
a consumer gives the bank permission to pull his credit report during
the application process for a new loan, bank card or credit card,
and during the periodic review of clients' accounts to determine
whether to increase a consumer's credit limit.
Karen Gross, director of the New York Law School
Economic Literacy Coalition, believes some lending institutions are using the
score for their own compliance risk.
"Banks are required, by law, to keep a reserve
based on potential bad debt losses," she says.
"In other words, to ensure the solvency of our
lending institutions, we require that they maintain a certain capital-to-risk
ratio. Bankruptcy scores give banks a more finely tuned instrument
by which to assess true risk within their portfolio. As such, the
bankruptcy scores could enable lenders potentially to lower their
bad debt reserves because they can more accurately assess and hence
narrow potential risk."
Credit reporting agencies weren't the only ones dabbling
in this innovative approach.
Researchers say a few credit card companies in the
late '90s developed a means to make the score a more powerful tool
based on a combination of factors, including information that was
right in front of them: consumers' spending habits and types of
charges.
"They could see that level of granular detail.
So what they tried to do is combine credit bureau information and
transactions to get a better idea," says Mike Staten, director
of the Credit Research Center at Georgetown University in Washington
D.C. "They would use that and make the score available and
even go as far as sending to issuers, that subscribe to their service,
specific alerts when a person exhibits warning signs of higher bankruptcy
risk."
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