Re-establishing Credit after a Bankruptcy or Credit

Going through a bankruptcy or financial hardship could leave you with a sense of hopelessness about being able to qualify for credit in the future.

Bankruptcy doesn’t carry the stigma it used to. With the past economic turmoil, more and more people were forced into bankruptcy. There are still others who opted not to file for bankruptcy and tried to hang on. Whatever the case may be, their credit reports have been ruined.

With so many people going through hard times, lenders and other institutions have created programs to help individuals reestablish them selves in the world of credit.

Lenders see you as being a higher risk, which results in higher interest rates and lower lines of credit. Many people will balk at paying the higher rates; however, unless you are willing to wait seven to ten years to have all the negative information dropped from your credit report, you need to start somewhere.

There are subprime lenders who will make loans, to people with past credit problems. There are automobile dealers who will help those with past credit problems purchase or lease an automobile. There are credit card companies who offer secured credit cards and a few credit card companies who will offer you an unsecured credit card if you have had no credit problems within six months of your application.

Once you have established good credit for at least two years with no delinquencies, try to refinance your home or car to get a lower interest rate. Also with credit cards, you can try to qualify for a lower interest rate card and pay your higher interest rate card off.

The interesting thing about qualifying for credit after a bankruptcy or a financial hardship is it is easier to be approved to get a mortgage and automobile rather than a credit card. The difference between the two is that a home mortgage and automobile loan are secured by the properties, and a credit card is unsecured.

There is always a way to reestablish yourself after hardship. It just takes time and patience.

The main thing to remember is to never pay any of your bills late where a negative mark would be entered on your credit report after your bankruptcy or past credit problems. It will automatically disqualify you for any new credit.

ANGELA’S STORY

Angela had a messy divorce which left her credit report in shambles. She was determined to try and pick up the pieces of her life and reestablish new credit in her own name.

When Angela called my office she told me she wanted to get her credit report cleared of all the inaccuracies being reported. Her goal was to rebuild her credit and purchase a house.

The first thing I did was have Angela request copies of her credit report. Most of the entries on the credit report were her ex-husband’s accounts and had a negative rating.

She sent letters to the credit reporting agencies disputing all the inaccurate accounts. I instructed Angela to get two secured credit cards and establish a good payment pattern, which would be reflected on her credit report.

About ten months after Angela had begun reestablishing her credit, she called to let me know that she was making her final payment on her automobile. She was so excited because all her payments had been on time and she knew that the entry would look good when trying to qualify for a home loan.

Angela had never mentioned anything to me about her car loan. I went back and reviewed her credit report and discovered the company who financed her car never reported any payments. I asked Angela about this and she telephoned the loan company. Evidently the loan company did not subscribe to any of the credit reporting agencies. The past three years that Angela thought she was rebuilding her credit history on her credit report was for nothing.

I explained to Angela that in order to rebuild her credit report with positive credit history she needed to show the car payments being made.

Angela’s car was an older model and needed repairs. She was devastated.

I introduced Angela to an auto specialist who was able to help her get into a new car. The loan company that he matched Angela with reported to all three of the credit reporting agencies.

Angela couldn’t have been happier. She had a new car and was able to establish a good payment history with the loan company. Her accounts with both the secured credit card companies also were reported as an excellent rating. Her dream of buying a home was on its way to becoming a reality.

By waiting and rebuilding her credit, Angela will be in a position to purchase a home within two years of establishing her new credit.

REESTABLISHING CREDIT AFTER TWO YEARS

Q. Two years ago I was forced to file for a bankruptcy because my business failed. What can I do to reestablish myself?

Reestablishing credit after a bankruptcy can take some time. It is not an overnight process.

If you were unable to keep one or two of your credit cards after your bankruptcy, getting a secured credit card would be a good beginning. There are banks who offer a VISA or MasterCard if you secure it with a deposit at their banks. Check with your local bank to see if a secured credit card program is available. When you get your secured credit card, make small purchases and pay the purchases off with each statement. This will show a good payment history.

A cosigner for a loan may help you in reestablishing credit. A friend or relative can request a user credit card in your name on her or his credit card to show a line of credit for you.

Car dealers have special deals for individuals who have filed bankruptcy. Be prepared to pay a large deposit and a high interest rate.

Once you have established new credit after your bankruptcy, make sure you have a budget set so you do not fall into the same trap as before. It could take two years before you are able to get credit easily.

PURCHASING A HOME

Q. We were doing great financially. My husband was making a good income. Our credit card payments were $900 per month. He was laid off his job and later diagnosed with a brain tumor. We could not pay our bills. We went to Consumer Credit Counseling Service but our situation was too bad for them to help. We filed for bankruptcy. We are now trying to put our lives back together. One day we want to buy a home. Is this possible?

Yes, it is possible, however you must wait at least two years before you could possibly qualify for a new mortgage. There are a few lenders who will give you a home loan prior to the two years; however you would have to go through a mortgage broker who has access to different lenders offering these programs.

The lender will want to see two to three new open accounts with a good payment pattern since the bankruptcy or credit problems.

There is a question in the loan application for a mortgage that will ask you if you have ever filed for a bankruptcy. It is important that you inform the loan officer about your situation before you apply. A bankruptcy is a public notice, so if for some reason it is not on your credit report, it is filed at the county recorder’s office, and it could easily be revealed. Have the lender pre-qualify you before you look for a home.

The lender is looking for several things in qualification. They want to see that you have been able to reestablish good credit since your bankruptcy. Job stability, income, and your down payment will play an important role in your qualification.

Another way to purchase a home would be to assume someone else’s FHA or VA loan. If you have the money to assume the loan, there would be no qualification. You would not have to wait any length of time to after you have had the credit card for at least two years and show a good payment history, apply for an unsecured credit card with a lower interest rate.

The interest rate on a secured credit card is usually high, and there is usually an annual fee plus a one-time set up fee.

UNSECURED CREDIT CARD OFFERS EVEN WITH PAST PROBLEMS

Q. Jam getting offers for an unsecured credit card. The application says I can get one even with a past bankruptcy. What is the catch? How does this program work?

There are companies now offering unsecured credit cards to individuals who have experienced past credit problems or a bankruptcy.

The interest rates are high, the annual fee is high, the set-up charge is high, the limits are low, and there usually is no grace period with the interest.

These credit cards can help you reestablish your credit, but read the small print on the application. Once you are reestablished, close the ac count and get a better low interest credit card.

STORE CREDIT CARDS

Q. Can I get a store credit card with a past bankruptcy?

Sometimes, if you explain your situation to your local merchants, they may have special programs available to you. The merchant may require a large deposit, and a high interest rate. The most important thing to find out is if the merchant reports payment history to a credit reporting agency. If they do, make your payments on time, and pay the account off as soon as possible. You are only trying to improve your credit rating. If the merchant doesn’t report to a credit reporting agency, try another merchant. Don’t get credit with any merchant unless it is a subscriber to a credit reporting agency and reports your payment pattern monthly.

AUTOMOBILES

Q. I need a new (or used) car. Three years ago I had severe credit problems but have since paid off my old debts. My credit report looks bad. Where can I get a car without paying an exorbitant interest rate?

After going through past credit problems you need to realize that most banks who work with the car dealers will consider you a high risk.

Sometimes it is easier to lease a car rather than purchase one. If you find a dealer that will lease a car to you, it probably will offer you a two- year lease. If you can afford it, take it. The reason you want to take ad vantage of the two-year lease is to demonstrate that you will make all the payments on time and establish a good payment pattern.

Once the lease is up, you will be in a better position to get another car and you would have improved your credit report.

If you have had a repossession of a vehicle and it is reported on your credit report, it is more difficult to get into another car loan.

There are some dealers who specialize in individuals who have had a bankruptcy or problems with their credit, including repossessions. Be pre pared to pay a large deposit and high interest rate. If you have paid your account on time, after 24 months you may be able to have your bank or credit union refinance the car at a lower interest rate. Be sure to make your payments on time to build up your credit report. Be sure your payments are reported to the credit reporting agencies.

PAY OFF OLD BILLS THAT WERE DISCHARGED

Q. I went through a bankruptcy several years ago. All my accounts were discharged. I want to go back now and pay them off Will this help me get new credit?

If you went back and paid off all your debts that were discharged through the bankruptcy, it may or may not help you get new credit. It depends on what type of credit you were trying to get.

I would suggest that if you do pay off the debts that were discharged, that you make an agreement with the creditor to remove the entry from your credit report or report that it is paid in full. If the creditor will not make any changes on your credit report, get a letter from them stating that the account was paid off.

You will be more likely to get a home loan and automobile with possibly better interest rates if you paid your past debts off. Trying to get a credit card could be more difficult.

When you get a home or automobile loan, you usually have a sales representative who you can explain your situation to and provide the appropriate documents to boost your chances of qualifying for a loan with the best rates. On the other hand, when you apply for a credit card there is no representative to help you. There is only an application that is turned in and a credit report that is run, not giving you the opportunity to explain your situation.

Many people fight having to file for bankruptcy and feel guilty doing it. With a bankruptcy, the court forgives the debt, which is reported as discharged. It is important that you forgive yourself and not fall into the same problems which caused you to go bankrupt.

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