While lenders are always interested in lending money to new clients, they are also trying to reduce the risk of a loan. Credit ratings are one of the most practical ways to avoid these risks. There are, of course, many other ways to assess the risks of lending money, including credit history, income, general financial condition and bankruptcy rating.
In general, the average Canadian has never heard of the risk of bankruptcy, it is a little known form of risk assessment and assesses your general creditworthiness.
How does it work?
Your risk of bankruptcy assesses the likelihood that you will have to file for bankruptcy over a period of time, usually 24 months. This affects your creditworthiness because people with a high risk of possibly having to declare bankruptcy are less desirable for a loan.
When you declare bankruptcy, your lenders will need to absorb the losses associated with your outstanding loans. A risk of bankruptcy allows your potential lender to assess the risk that any loan they may give you ends up completely irrecoverable.
The risk of bankruptcy is often described as being kept secret. Indeed, you can not access this one as in the case of your credit rating. A bankruptcy risk is only used by lenders. There is no regulation on how lenders calculate this rating. For some, the higher the rating, the better and for others, the lower it is, and the better.
Is it similar to a credit rating?
Yes and no. The credit score and the risk of bankruptcy are both a way for borrowers to access your solvency and at the same time very different. Your credit rating must be high in order to access a loan and the interest rate you want. However, you surely have no idea how much your bankruptcy risk should be.
Someone with a high risk of declaring bankruptcy could still have a good credit rating. Bankruptcy risks and credit ratings indicate different types of risks; this is why it is necessary for a lender to properly assess the potential of a new borrower.
Generally, a person on the verge of declaring bankruptcy will demonstrate certain behaviors towards his credit. Here are some factors that affect the calculation of your credit rating:
- An increase in the amount of credit that the consumer uses
- Many new loans, credit cards and payday loans
- Large debt that has been dragging on for a long time
- When it’s obvious that a consumer lives on their credit cards
Keep in mind that these are general guidelines and that most lenders have their own ways of calculating and using a risk of bankruptcy.
How to improve your risk of bankruptcy?
Since bankruptcy risk ratings are kept secret and are not managed by any regulation, it is difficult to give advice to anyone about it. However, if you are rejected for a loan because of a bad bankruptcy risk rating, you must improve your overall financial health.
This can be done in the same way as for your credit rating.
- Trying to repay the majority of your debts
- Always make your payments on time and completely
- Continue to use your credit responsibly
- Always pay close attention to your available debt / credit ratio. Lenders see credit cards filled as an alarming sign.
Manage your debts
If you really need to declare bankruptcy, you should quickly seek the assistance of a licensed insolvency trustee. He can advise you and make sure that you manage your debt problems. This will help you improve your credit and bankruptcy risk ratings and create a better financial future.