Tips for improving your bankruptcy risk score

Although few people are aware of their bankruptcy risk score, and even fewer have actually seen it, the score could have a big impact on your credit life.

Improving the score could have significant financial benefits.

If you’re already making an effort to increase your credit risk score, you’re in luck. Many of those steps will also influence your bankruptcy risk score. According to experts at the Fair Isaac Corp., a leading developer of credit scores, you’ll want to place the following actions high on your list.

Pay all your bills on time

Late or missed payments, an account that has been referred to collections, a repossession or a declared bankruptcy can have a negative affect on your score. So, get a copy of your credit report to see if any mistakes are listed. Under the Fair and Accurate Credit Transactions Act, you are entitled to receive one free copy of your credit report from each of the three major agencies. File your disputes with the credit bureau and/or contact the creditor.

Also, set up automated payments to help you avoid a late bill in the future, but make sure money continues to flow into your bank account.

Keep debt balances low

Don’t forget about the balance-to-limit ratio. One credit card that’s creeping up on the limit can have a greater negative effect than multiple cards that have a minimal balance.

Manage your money in order to keep debt in the low numbers. If you have exceeded your credit limit and are facing a difficult time, such as a medical crisis, call the creditor and explain the situation. See if the creditor can work with you and possibly come up with a repayment plan.

Open accounts only when necessary

Opening too many accounts can hurt you.

“A person who opens several accounts in a short period of time is statistically more likely to have problems repaying creditors — and as a result can drop both their credit risk score and bankruptcy risk score — than someone who opens new accounts sparingly,” says Craig Watts, spokesman for Fair Isaac.

“Consider that the average American consumer applies for new credit fewer than two times per year. Also consider that when consumers are in credit trouble and have tapped out existing accounts, a common reaction is to open several new accounts in a short period in order to obtain the money to meet essential obligations like rent, food and car loan payments. While such behavior may keep the wolf from the door a while longer, it inherently increases the risk that the person will become seriously late in repaying any one creditor in the next two years.”

If you’ve paid off a credit card, wait before closing the account. Long credit histories help lenders decide whether they want to do business with you.

Also, try to limit credit inquiries, and don’t apply for unnecessary credit.

“Statistically, a person whose credit report shows she has applied for new credit six or more times in the past 12 months is eight times more likely than other consumers to file for bankruptcy,” says Watts.

“However, there are times when shopping for new credit isn’t necessarily riskier. When you are looking for the best mortgage or an auto loan, multiple lenders may request your credit report or score even though you’re only looking for one loan. To compensate for this, the bankruptcy risk score counts most multiple auto or mortgage inquiries as just one inquiry.”

For more information on how your bankruptcy risk score is calculated, see the main story, ” Do you know your bankruptcy risk score?