Now that your bankruptcy has been completed and discharged, it’s a great time to take steps to review your credit reports with an eye toward improving your credit scores. With that in mind, here are some helpful hints.
1) Believe it or not, you have already taken one giant step toward improving your credit. When your bankruptcy is complete and discharged in most cases you have no debt, other than possibly a remaining mortgage and in some cases student loans or taxes which survive the discharge. This improves your debt-to-income ratio; the percentage of your income which goes toward paying your debt (debt payments divided by monthly income). The lower your debt-to-income ratio, the more credit worthy you are.
2) Review your credit reports about 3 to 6 months following the completion of your bankruptcy case. Once a year, you can pull a report from each of the 3 major credit bureaus (Experian, Equifax, Transunion) from www.annualcreditreport.com .
* All accounts which were discharged in your bankruptcy should be reflected that way; they should not reflect any balance due, nor should they reflect any payment history since the date the case was filed. Any debts which were reaffirmed in your bankruptcy should reflect a current balance as well as a post-discharge payment history.
* Bankruptcy does NOT affect public record information (past lawsuits, judgments, liens, bankruptcy). Debts associated with these events may have been discharged, but the fact that that they occurred remains a matter of public record and will not be removed from your credit report as a result of a bankruptcy discharge.
* If you find errors in your credit reports, you can dispute them online. You will find each credit bureau’s dispute process online as you are pulling your reports. The process is free and it is not difficult. BEWARE of anyone who advertises they can clean up your credit report for a fee!!
3) Credit card offers will flood your mailbox following a bankruptcy discharge. Typically, the interest rates on these cards are extremely high and banks are counting on the fact that you are afraid you will never have another credit card and that you are anxious to re-build your credit. These cards generally come with a low credit limit and sky high interest and very often charge an annual fee. By the time the credit card has charged all of its fees and interest, you receive little to no benefit of having the card, yet you must continue to pay it. If you choose to open an account with one of these cards, here are a few helpful hints.
* Do not carry a balance in excess of 33% of the available credit on the card; using but not over-using your available credit demonstrates responsible use of credit to lenders.
* Use the card and pay off the balance in full each month. In this way, you are not paying for the high interest rate and finance charges.
Another option available is a secured credit card. Here, you put down a deposit (usually $500.00) which sets your credit limit. Over time and with responsible use of the card, the lender will typically increase the credit limit without requiring additional deposits. It is still important to read and understand all the fine print regarding interest rates and finance charges.
4) It may surprise you to learn that purchasing a car following bankruptcy is actually fairly easy. Again, lenders know you are anxious to rebuild your credit, you have no debt, you cannot receive a discharge in a new bankruptcy for eight (8) years and you may well be driving an older vehicle. However, as in the case of credit cards, many of these lenders are predatory; the interest rate on a car loan is going to be very high and your ability to negotiate is extremely limited. There are also “Buy here, Pay here” lots which offer financing on used cars to credit compromised customers again at exorbitant interest rates. These dealerships make their money by selling cars to people who cannot afford them, and then repossessing the cars and re-selling them, over and over again.
If you own a vehicle free and clear and it is still reliable, it is advisable to keep it as long as possible in order to put some distance between you and your bankruptcy. If you must replace a vehicle, try to buy a “cash car” for the same reason. Once some time has gone by, if you feel you have the ability to take on a car payment, there are a number of reputable dealerships in the Kansas City metro area where we are comfortable referring our clients.
Finally, here are a few things to remember about credit as you set about the business of putting your financial house in order.
Credit is designed to help you live within your means. It should be used for emergencies or large expenses when you aren’t able to use cash. Credit should not be used for expenses above and beyond what you can legitimately afford. Before you use a credit card, you should already have a plan in place to pay for that purchase.
Saving money, even just a small amount per month, will help you avoid becoming dependent on credit. That way, if you find you have a large expense you can’t avoid (a furnace, for instance) you can offset the amount you put on a credit card (and pay interest on) by paying for part of it with cash.
By Betsy Hayman, W M Law Paralegal
