Credit Score Changes Decrease Bankruptcy

February 19, 2020

Major changes are coming to how credit scores will be calculated.  These credit score changes will likely make it more difficult for many people to obtain new credit.  This, in turn, will likely decrease the total amount of bankruptcy filings to some degree. People who historically have turned to bankruptcy may have a lower credit score soon, which will decrease their ability to get into more debt.

Late Payments – New Credit Score Changes

Late payments will now trigger a larger dip in credit score.  People in danger of bankruptcy are usually more likely than others to suffer from late credit payments.  This could decrease credit scores before these people are able to get into more debt. Late payments have always had a strong effect on credit score, but this effect will now be intensified with the recent changes.

Not Paying Off Credit Cards in Full

If you do not periodically pay off your credit cards in full, this will now have an adverse effect on credit.  In the past, a certain ratio of credit card balance was more preferred than paying the credit card off in full.  Now, the greater reward will go to paying off credit cards in full.   

This will have a powerful effect on decreasing the credit ability of people who are in danger of bankruptcy.  As credit cards build, credit scores will suffer. This can potentially cause the never-ending increase of credit card debt to be cut off much earlier.  It may allow some people to stop incurring credit card debt at a point where they will actually be able to avoid bankruptcy.

Personal Loans

Personal loans will now have a greater damaging effect on credit score.  Personal loans are usually used to catch up on bills. Other times, they are used to purchasing things that cannot be afforded.  Personal loans are a tell-tale sign that bankruptcy may be coming in the future. Personal loans may now do sufficient damage to credit to prevent the incurring of future debt.  This may also have the potential to ultimately decrease bankruptcy filings.

Conclusion: Responsible Lending Reduces Bankruptcy

On the most simple level, responsible lending choices ultimately reduce bankruptcy filings.   If the changes to credit score calculation reward good credit behavior and penalize bad credit behavior, then ultimately bankruptcy filings will be reduced.  The best evidence of this was the irresponsible mortgage lending that led to the 2008 financial meltdown. The ensuing bankruptcies were largely a result of those irresponsible lending and credit calculation choices.  Better credit calculation can result in a more stable economy and reduce bankruptcy.

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