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How to repair your credit score after bankruptcy

by CreditScore.net Staff Writer on May 16, 2012

Bankruptcy hurts. It can seem like the end of the world to some. Picture everything you once owned gone in the blink of an eye. And starting over doesn’t just seem difficult, it truly is difficult. You’re a credit liability. And creditors will see it that way…for a while.

But bankruptcy isn’t the end of the world. You can come back and start to rebuild that trust with creditors. It isn’t always easy, and it takes some time, but if you’re able to learn from your previous mistakes, it can be done. Here’s how:

How bankruptcy affects your credit score

Bankruptcy is the single most damaging thing that can appear on your credit reports. For a while, getting any kind of loan or line of credit will be near to, if not completely, impossible. And once it’s there, it’s going to be there for a while. Over time, however, the damage bankruptcy does to your credit score will start to diminish, but only if you’ve kept the rest of your records clean for that time.

How much it impacts your score also depends on the type of bankruptcy was filed. Because with Chapter 13 bankruptcy you still have an opportunity to pay off a portion of outstanding debts and keep some assets, the effect isn’t quite as harmful as Chapter 7 (complete liquidation). Also, Chapter 13 can be removed from your credit reports in as little as 7 years after the debts are paid, while Chapter 7 it will remain for the standard of 10 years.

Before you begin: Educate yourself & learn from past mistakes

The first and most important step to recovering from bankruptcy is learning from the mistakes that got you into the mess in the first place. Get acquainted with your credit reports, they’re free once a year. Look over your past history paying close attention to the growing amounts of debt over time and the increasing late payments that followed. It’s not hard to see how quickly things get out of hand. Next, learn how to manage your reports: monitor potential negative marks, getting errors removed, etc.

This is also a good time to reflect on your relationship with money and the possessions you want to buy with it. It’s a time for hard truths and, in most cases, a total change of attitude towards spending. If you aren’t brutally honest with yourself or willing to make sacrifices to your lifestyle, you’ll be back in bankruptcy court before you know it.  It’s a great time to start being frugal.

Phase 1: Budget and save

Because immediately after bankruptcy getting a line of credit won’t be much of an option, the only thing you can do [at first] is focus on your income, spending, and develop a personal budget. First and foremost, make sure you are able to pay your remaining current bills (e.g. rent, utilities, student loans, etc.) on time. The very last thing you want during this stage is any more negative marks on your credit reports. Next, create and maintain a budget including these bills and all your other regular spending.

Keep. Track. Of. EVERYTHING.

In the first couple of years you need to also focus on building savings.  Mostly, because you won’t have the option of using credit for any larger purchases you’d like to make. But even more importantly, however, is that if you aren’t able to budget and save money, you aren’t ready to start using credit.  If you can’t save, it means you’re spending all the money you are making, and adding credit to that will only put you over the top. Another reason savings will be important is because when you are ready to take out a loan, creditors will want a significant down payment due to your poor credit standing (especially if you want a lower interest rate). So during the first couple of years after bankruptcy, focus on spending less money than you make and set the rest aside for larger as well as future purchases.

…Then you’ll be ready for phase 2:

Phase 2: A fresh start to your credit history

Once you’ve figured out a personal budget and have started to build up some savings, it’s time to start building a positive credit history again. This isn’t something you should jump into lightly, however. The key, here, is to start out slow and get used to utilizing credit without changing anything about your budget.

Something you need to be careful of, in this stage, is requesting too much credit. Applying for credit cards and loans can hurt your credit score, even if you are rejected. And that’s clearly not something you’ll want to do when the goal is to increase your rating. Instead, look at some other [beginner] options, like secured credit cards. These cards set your “credit limit” to the amount of an initial deposit. They’re a great way to build up a trust with credit reporting agencies as well as a great way to get used to making regular payments on a credit card. Only use it for things you have the cash to pay for and ***get used to paying the entire balance each month***.  If you can’t do this, stop using it immediately until you can, it’s that important.

Phase 3: Graduating to more serious credit usage

After a couple of years of using limited credit following a bankruptcy, you can’t expect your credit score to improve a whole lot. But after showing responsible use of a secured credit card, you might be ready to graduate to more beneficial credit-history-building revolving debt (i.e. typical credit card). Even though interest rate offers will be high, if you continue to pay the balance in full each month, you can avoid paying interest altogether. Stick to the plan: use the card more-and-more for everyday purchases, and don’t change anything about your budget. Even for big purchases, for example: save up for a TV you want and when you have enough cash, use the credit card for the purchase and pay it off right away (with the savings).

Something to be weary of before you can graduate to more serious loans is interest rates.  One of the major drawbacks for a poor credit rating is the higher interest rates. So before you consider taking a loan, mortgage, or even keeping a balance on a credit card, be sure you’ve built up your credit enough that you don’t pay the highest (poor credit) rates. Yes, this could take years, but the longer you can hold off, the better off you’ll be. Just continue to save, and that will help you out with the next step:

One way to reduce interest rates on loans is by making a larger down payment.  This is why savings is so important early on.  With secured loans, like mortgages, the more principal you can pay, the safer the loan will be for the bank. If you can afford 20% down, you usually get the preferred rate [sometimes] even if you don’t have the best credit score. High interest rates will cost you money in the long-run. More dangerously, it can become the driving force for repeat problems. If you can’t get a preferred interest rate consider waiting to make the purchase (and continue to save) until you can.

Phase 4: Full recovery

10 years after filing bankruptcy you can have a near perfect credit rating with no negative marks. Not only will the bankruptcy be off your reports, but most of your old closed accounts (with blemishes) should also be gone. Also, if you’ve been responsible since, making payments on time, 10 years is a relatively long time to build a good amount of positive credit history.

Categories: Advice, Credit Cards, Credit Report, Credit Score, Debt

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Student loan interest rates may be going up – what you should know

by CreditScore.net Staff Writer on May 11, 2012

It certainly feels like this sometimes...

Bad news for students borrowing for college this past week:

The Senate failed Tuesday to advance a bill to keep federally subsidized college student loan rates lower for another year, prolonging debate on an issue that has emerged as an election-year flashpoint

Student loan interest rates for federally subsidized Stafford loans may as much as double, to 6.8%, this summer. The rate has been lowered since 2007 as a way to ease the burden of student loans. The failure of an extension of this part of the program is

While the rate probably seems high, the reality is, it may not be quite as bad as it sounds. The average additional cost per student (over a 10 year payment plan) would be about $2,600 or approximately $28 per month. But, of course, students need all the help they can get these days. So regardless of how objectively bad the reality is, it’s a step in the wrong direction for today’s students.

What the political debate is about

The debate isn’t about whether or not to extend the lower interest rate…both sides agree that it’s a good idea. The debate is how the extension is to be pay for it. According to the Washington Times article:

A House Republican plan approved in late April would pay for the lower rates by cutting almost $6 billion from a preventative health-care fund established in the Democrats’ health care reform bill.

Democrats pushed a plan to pay for the extension by ending a tax break that allows operators of some businesses with three or fewer shareholders to avoid paying payroll taxes by labeling some of their income as business profits rather than wages.

And now, the issue is being used as a part of the political posturing/blame game, with students caught in the middle.

Why student loan interest rates are so high

Because prospective students have little to no credit history, interest rates aren’t a reflection of the individual student’s responsibility with debt (credit score, etc.). Also, unlike other kinds of loans, interest rates don’t vary based on how much an individual borrows. Instead, student loan interest rates a reflection of the pooled risk among all student loan borrowing.

Two major factors are involved:

  1. How much overall student loan debt (yearly demand)
  2. The average estimated time of payback

The second factor is certainly affected by the first, but is additionally influenced by the overall job market for students who borrowed.

The main reasons student loan interest is currently so high is because overall student debt is at historic levels, driven by rapidly rising costs of education; and the job market is extremely weak, driven by poor economic recovery. Not just high unemployment, but also low salaries.

So while extending the low interest rates is probably the right thing to do for students, the discussion of how to pay for it should include a focus on ways to reduce the rates naturally. This means a focus on job creation for new graduates as well as ways to keep the costs of education under control. Not just to make paying loans back easier, but ways to reduce the demand for student debt in the first place.

What this all means for students

If the government doesn’t find a way to extend the low interest rates, next year’s students will be the ones that take the hit. Interest rates for past loans won’t change, but any new loans will be set at a higher rate. So what does this mean for students, exactly? Here’s the rub:

The maximum Stafford loan amount (for a 5 year degree) is $24,500. If it took the maximum 25 years to pay off, the higher interest rate could cost a student as much as $14,600 or about $50/month in additional interest payments. This is the worst case scenario.

If the high costs of education wasn’t enough of a wake-up call to students, the prospect of paying high interest rates should be. It’s an indication that college graduates are having an increasingly difficult time paying off their debt, so prospective students need to start taking it more seriously.  Here’s some advice for potential and current students:

  • Know what you’re getting into: keep track of the amount and interest rates for all loans and understand what you will will owe overall when you graduate.
  • Reduce dependence on borrowing by:
    • Choosing less expensive programs/schools (state school, community college, etc.)
    • Save for school, work summers & throughout school and pay more tuition up-front
    • Pay off loans quicker after graduation
  • Take job prospecting & school more seriously
    • Get hands-on work experience BEFORE you graduate
    • Work with career centers & academic advisers/mentors
    • Consider career options before entering college (especially if you are borrowing)

Categories: Debt, News, Student Loans

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Using credit scores as a job qualification – Is it ethical?

by CreditScore.net Staff Writer on May 4, 2012

An unemployed banker and father who is having trouble finding work has lost his home and finds himself in a heap of credit card debt just so he can feed his family. He applies for a job that he’s perfectly qualified for, but gets rejected because the employer did a credit check and his low credit score disqualified him from the position.

Across town, a recent graduate with tremendous qualifications enters the workforce with an above average amount of student debt. Also, to be responsible, she never so much as tried to open a line of credit to pay for her expenses while in school. Unfortunately, despite having actual work experience and tremendous grades, she can’t even get an interview as an accountant purely on the basis of her poor credit score.

When I hear or read about stories like this it makes me sick to my stomach. It’s hard to improve your credit score without income, and it’s harder to get a job with a low credit score. The system seems rigged. But you know what the honest truth is? Credit reports aren’t a perfect measurement of responsibility. So the question is: should employers even be able to use it?

It’s more common than you’d like to think.

According to a study in 2010: about 60% of companies polled did credit background checks for prospective employees. Another study from about a year earlier found that 1 in 10 employers said they’ve disqualified candidates based purely on credit scores.

It’s much more prevalent for some positions than others, however. For example, jobs that fiduciary or financial responsibility, credit checks were conducted 91% of the time. For health care positions where a person had access to drugs, on the other hand, it was used only 3% of the time. [Source]

It’s also a quickly growing trend. Perhaps more concerning, is that the poor state of the economy, particularly the job market, is partially a driving force behind the trend. As if the recession didn’t make it hard enough to get a job…

Petitions to restrict or ban the practice

A number of attempts to outlaw the practice of employment credit checks have been attempted to a varying degree of success. In 2009, the equal employment for all act (H.R. 3149) was introduced to congress looking to restrict the practice nationally except in rare circumstances (like accounting or banking institutions). The bill failed and was later killed (sent to committee). In Oregon, a bill that was modeled after H.R. 3149 passed and has been in effect just short of 2 years now. Oregon isn’t alone, however. At least 25 states have debated similar resolutions.

There are also current efforts to gain support for renewing discussions on such restrictions on a national level. To date, the petition has over 135,000 signatures and just passed 100,000 only two days ago. It asks potential signers to join them and:

“25 national civil rights organizations in calling on TransUnion to stop its sale of credit reports to employers.”

A suggestion for employers:

 

As an employer myself, I understand the temptation to use something like a person’s credit history to determine their responsibility – especially if that person will be handling company finances in any way.  But you have to be careful not to rely too heavily on these things without the proper context.

Using credit scores to create a minimum requirement (as opposed to deeper analysis of credit reports) leads to such a lack of context. There are a number of acceptable reasons why a persons score doesn’t accurately reflect their responsibility with money: lack of history, recent loss of income, identity theft (to name a few).

If employers are going to do a credit check on candidates, they need to be able to properly analyze the complete reports to get a better idea of what may have caused a poor score. If you understand what you are looking at, you should be able to pick out those whose credit scores are low through no fault of their own. And who knows, if employers used credit reports more responsibly, and not punish those who’s poor credit is no fault of their own, people wouldn’t be calling for a ban of the practice.

Advice for job seekers:

While it can sometimes seem like an unfair requirement, it’s not as though there’s nothing that can be done about it. Be proactive about your credit history:

  • Check your own credit reports first for errors or blemishes
  • Pay down credit cards and other revolving debt as much as possible
  • Establish a positive credit history – no time like the present!
  • Get current on bills and make payments on time

Is it ethical?

I’m torn.

While it’s hard to defend those who misuse credit scores and reports for employment decisions, that doesn’t mean I believe it can’t be used responsibly.  There are circumstances where credit reports can provide a telling sign that a person is not responsible enough with money to be trusted to handle it.  But what we can’t allow, is for a system that makes those with debt (of any kind) at a general disadvantage for getting out of debt.

That is a huge problem.

 

Categories: Credit Report, Credit Score

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What it means to be Frugal

by CreditScore.net Staff Writer on April 29, 2012

I was having coffee with a friend of mine the other day and she was telling me how she saved over $200/month by taking the train into work.

“How frugal of you.” I complimented.

But she did not look like a person who had just received a compliment. Not at all. Instead there was a confused anger to her face as if I’d just insulted her in a horrible way. “I’m not- FRUGAL, you know!” She finally spat at me.

She obviously misinterpreted what I meant. But more confusingly: since when did people get offended by being called frugal? It’s supposed to a good thing!

Frugal doesn’t mean cheap

After we cleared up our little miscommunication, it became clear she thought I accused her of being cheap. “On the contrary,” I suggested. “I mean it as a compliment. It’s wasteful for you to drive to work every day. What you’re saving could pay for your car! That’s not cheap, that’s smart. It’s frugal.”

It got me thinking, too, about the difference between frugality and cheapness:

  • A cheap person doesn’t see value in spending money. A frugal person can.
  • A cheap person would buy the least expensive car that can get him from point A to point B.
  • A frugal person would buy the car that’s going to get him from point A to point B for the least overall cost, taking into consideration longevity, maintenance fees, gas mileage, etc.
  • Frugality is thoughtful, cheapness is stingy.

Frugal means stretching all your resources to their fullest

Being frugal is less about how much money you spend and more about how far you can stretch each dollar. It means getting the most out of all purchases, possessions and resources.

Just like my friend is doing. Not only is she saving a ton of money on gas and parking each day, but by not using her car for her daily commute it’s going to last longer and retain its resale value better, too.

Believe it or not, her commute is actually quicker too (usually). So she can even sleep later and gets home earlier each day. That’s frugality at its best, because guess what: time is a precious resource.

Frugality isn’t just about the savings

Savings isn’t the only thing that’s important to a frugal minded person. Putting your resources, money, and time to work for you is also a part of it. It could be renting out an extra room or apartment. It could be paying down debt or investing with extra cash. Or it could be getting a second job or starting a small business with your extra time.

Frugality isn’t limited to your costs, it’s also about your income. It may be less expensive to make your own candles at home, but if you could spend the same time making some extra cash (more money than you saved by making candles), you’re better off buying store bought candles and using that time more wisely.

Frugal is efficient

Frugality is also about improving efficiency. That often includes initial investments for future returns.  Investments that can and will pay for themselves through a greater efficiency.  Not only from a resources standpoint, but also financial efficiency.  For example:

When I bought my house, it had an ancient oil furnace, and an aging electric water heater. The first thing I did was switch to a natural gas furnace. Not only was natural gas less expensive, but the new burner was tremendously efficient. Next, I switched to a tank-less hot water heater (also gas) that only heats the water as I need it. Not only does this mean endless hot showers (if we need it), but it means efficiency of not having to keep a tank of water heated 24-7 (which is particularly expensive in the winter). I spent a total of $6000 between the two. But I average between $100 of savings per month (closer to $100 today with the price of oil). That was 3 years ago…by now I’ve saved over $2000. Both will have paid for themselves within another 5 years.

Frugal is responsible

Being frugal is not exclusively a short-term mindset, either. It’s about considering all the implications of your financial decisions, both short and long term. A frugal person considers retirement, saving for future purchases, paying down principal debt for interest savings, future value of assets, and diminishing value of disposable purchases. Through considering the factors of each finds the best way to allocate their funds for maximum possible benefit.

Frugal responsibility also means being diligent about goals and financial responsibilities. It means paying bills on time, being organized, and (most importantly) well informed. There’s few things more wasteful than irresponsibility, particularly when it comes to finances.

Waste is the antithesis of frugality.

Categories: Advice, Credit Score

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15 Blog Posts Discussing FHA Home Loans and General Mortgage Info

by CreditScore.net Staff Writer on April 29, 2012

With the current housing market there are not a lot of people buying, but things are starting to look up. If you are looking to buy a house then now is a good time because prices are down low and you could get a great deal on a nice house. There are many people that just don’t think they can afford to get into a house because of many of the upfront costs on top of putting money as a down payment. There are ways around this though if you really want to own a home and one of the best things you can look into are FHA home loans. With these types of home loans there are many different options available to help you out, sometimes you can even get into a new home with no down payment and still get a nice interest rate. These 15 blog posts discuss FHA home loans and some of the benefits from them. There is also some info in here that discusses FHA home loan modifications if you already own a home but are having trouble keeping up with your mortgage payments.

  • FHA Loan Resources – A State by State Listing – Here is a nice resource with State by State listings regarding FHA home loans and how you can get started obtaining one. This site has a lot of other good info on the topic as well and is easy to navigate.
  • FHA Home Loan Information – Here is another great breakdown of FHA home loans and many of the different options you can find as well as how these all work.
  • More Information on FHA Loans – FHA Home Loans are a great option for borrowers who have less than perfect credit, are seeking a small or no down payment loan.
  • FHA Home Loan Resources and News Blog – Another FHA resource blog with lots of great info regarding FHA loans, this page links to State guides and the rest of the site has great info and news.
  • Federal Housing Administration (FHA) Resource Center – Here is a comprehensive guide to up to date news and resources all about the Federal housing Administration and FHA loans.
  • Understanding FHA Loans – FHA loans are just like any other types of loans when it comes to the confusion they can create, here is an article and a website that can help you better understand how these types of loans work when buying a house.
  • FHA Home Loans Information and Mortgage Resources – This is a nice Squidoo lens related to FHA loans and has a nice collection of helpful and educational articles on the subject to help you better understand the process.
  • FHA Loans: Acceptable Sources For Down Payments – When getting an FHA loan, it is common for one of the biggest questions to be about the (currently) required 3.5% down payment.  Many people have questions about what is or what isn’t allowed when it comes to rounding up the 3.5% down payment that is required.
  • FHA Home Loans on the rise – The Federal Housing Administration is continuing to step up in an ongoing effort to help borrowers with less than perfect credit achieve the dream of purchasing a home.
  • Avoiding Foreclosure – the Obama Administration has implemented a number of programs to assist homeowners who are at risk of foreclosure and otherwise struggling with their monthly mortgage payments. The majority of these programs are administered through the U.S. Treasury Department and HUD. This page provides a summary of these various programs.
  • Loan Modification Resources – This blog is totally dedicated to saving your house if you are facing financial troubles and heading towards foreclosure.
  • An FHA mortgage modification can help you – In July 2009, the Federal Housing Administration (FHA) launched the FHA Home Affordable Modification Program (FHA-HAMP) to provide assistance to borrowers with FHA-insured loans who are unable to meet their mortgages payments.
  • Loan Modification FAQ – Here are some of the most commonly asked loan modification questions. The answers on this page will make understanding the mortgage modification process easier and more straightforward.
  • Mortgage Refinancing vs Mortgage Loan Modification Programs – This article helps you figure out if you are better off with a home loan modification or refinance your house. Both ways have their pros and cons as with anything.
  • Mortgage Resources – here is a great resource for all things related to your mortgage and answers to almost every question you may have can be found here.

Categories: Uncategorized

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