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At first, it’s a relief—you file bankruptcy, and the creditors
stop harassing you. Your phone stops ringing, you’re no longer
afraid to pick up the mail, and the juggling act ends. You can
devote your income to keeping up your living expenses and trying
to get your financial life back on track.
But many people who file bankruptcy are worried about what comes
next. They’ve heard rumors like, “You can’t get credit for ten
years after you file bankruptcy.”
Naturally, when you’ve just filed bankruptcy, your credit won’t be
strong. Of course, your credit probably wasn’t strong when you
were dealing with the crises that forced you to file bankruptcy,
so that’s nothing new.
Stepping back into the world
of finances without the burden of insurmountable debt is a great
feeling, some say it's a gift. The most important thing to do is
keep your self on the right track; make the right decisions, be
credit smart. Here are some things you should know about life
after bankruptcy to help you avoid the credit traps you will most
likely encounter after your discharge.
How can I use
credit wisely After Bankruptcy?
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Beware of Credit Offers Aimed at Recent Bankruptcy Filers
- Credit Repair
Companies
- Avoid High
Cost Predatory Lenders
-
Ten Things to Think About Before Getting a New Credit Card
-
Ten Things to Think About Before Using Your Credit Card
Beware of Credit Offers Aimed at Recent Bankruptcy Filers
“Disguised” Reaffirmation Agreement
Carefully read any credit card or other credit offer from
a company that claims to represent a lender you listed in your
bankruptcy or own a debt you discharged. This may be from a debt
collection company that is trying to trick you into reaffirming a
debt. The fine print of the credit offer or agreement will likely
say that you will get new credit, but only if some or all of the
balance from the discharged debt is added to the new account.
“Secured” Credit Card
Another type of credit marketed to recent bankruptcy
filers as a good way to reestablish credit involves “secured”
credit cards. These are cards where the balances are secured by a
bank deposit. The card allows you a credit limit up to the amount
you have on deposit in a particular bank account. If you can’t
make the payments, you lose the money in the account. They may be
useful to establish that you can make regular monthly payments on
a credit card after you have had trouble in the past. But since
almost everyone now gets unsecured credit card offers even after
previous financial problems, there is less reason to consider
allowing a creditor to use your bank deposits as collateral. It
is preferable not to tie up your bank account.
Credit Repair Companies
Beware of companies that claim: “We can erase
bad credit.” These companies rarely offer valuable services for
what they charge, and are often an outright scam. The truth is
that no one can erase bad credit information from your report if
it is accurate. And if there is old or inaccurate information on
your credit report, you can correct it yourself for free.
Avoid High Cost
Predatory Lenders
Don’t assume that because you filed bankruptcy
you will have to get credit on the worst terms. If you can’t get
credit on decent terms right after bankruptcy, it may be better to
wait. Most lenders will not hold the bankruptcy against you if
after a few years you can show that you have avoided problems and
can manage your debts.
Be wary of auto dealers, mortgage brokers and
lenders who advertise: “Bankruptcy? Bad Credit? No Credit? No
Problem!” They may give you a loan after bankruptcy, but at a
very high cost. The extra costs and fees on these loans can make
it impossible for you to keep up the loan payments. Getting this
kind of loan can ruin your chances to rebuild your credit.
Mortgage Loans
If you own your home, some home improvement
contractors, loan brokers and mortgage lenders may offer to give
you a home equity loan despite your credit history. These loans
can be very costly and can lead to serious financial problems and
even the loss of your home. Avoid mortgage lenders that:
Charge excessive interest rates, “points,”
brokers’ fees and other closing costs;
Require that you refinance your current lower
interest mortgage or pay off other debts;
Add on unnecessary and costly products, like
credit insurance;
Make false claims of low monthly payments
based on a “teaser” variable interest rate;
Include a “balloon” payment term that
requires you to pay all or most of the loan amount in a lump sum
as the last payment;
Charge a prepayment penalty if you pay off
the loan early;
Change the terms at closing;
Make false promises that the rate will be
reduced later if you make timely payments ;
Pressure you to keep refinancing the loan for
no good reason once you get it.
Small Loans
It is always best to save some money to cover
unexpected expenses so you can avoid borrowing. But if you are in
need of a small loan, avoid the following high cost loans:
Payday loans
Some “check cashers” and finance companies offer to
take a personal check from you and hold it without cashing it for
one or two weeks. In return, they will give you an amount of cash
that is less than the amount of your check. The difference
between the amount of your check and the cash you get back in
return is interest that the lender is charging you. These payday
loans are very costly. For example, if you write a $256 check and
the lender gives you $200 back as a loan for two weeks, the $56
you pay equals a 728-percent interest rate! And if you don’t have
the money to cover the check, the lender will either sue you or
try to get you to write another check in a larger amount. If you
choose to write another check, the lender gets more money from you
and you get further into debt.
Auto title loans
For many years, pawn shops have made small
high-interest loans in exchange for property. A new type of
“pawn” is being made by title lenders who will give you a small
loan at very high-interest rates (from 200 percent to 800 percent)
if you let them hold your car title as collateral for the loan.
If you fall behind on the payments, the lender can repossess your
car and sell it.
Rent-to-own
By renting a TV, furniture or appliance from a
rent-to-own company, you will often pay three or four times more
than what it would cost to buy. The company may make even more
profit on you because the item you are buying may be previously
used and returned. And if you miss a payment, the company may
repossess the item leaving with you no credit for the payments you
made.
Tax refund anticipation loans
Some tax return preparers offer to provide an “instant”
tax refund by arranging for loans
based on the expected refund. The loan is for a very short period
of time between when the return is filed and when you would expect
to get your refund. Like other short-term loans, the fees may
seem small but amount to an annual interest rate of 200 percent or
more. It is best to patient and wait for the refund.
What You Can Do to Avoid
Problems
If you don’t want it, don’t get it. If you have doubts
about whether you really need the loan or service, or whether you
can afford it, don’t let yourself get talked into it by a
salesperson using high-pressure tactics. You can always walk away
from a bad deal, even at the last minute.
Shop around. You may qualify for a
loan with normal rates from a reputable bank or credit union.
Don’t forget that high-cost lenders are counting on your belief
that you cannot get credit on better terms elsewhere. Do not
let feelings of embarrassment about your past problems stop you
from shopping around for the best credit terms.
Compare credit terms. Do not consider
just the monthly payment. Compare the interest rate by looking
at the “annual percentage rate,” as this takes into account
other fees and finance charges added on the loan. Make sure you
know exactly what fees are being charged for credit and why.
Read before you sign. If you have
questions, get help from a qualified professional to review the
paperwork. A lender that will not let you get outside help
should not be trusted.
If you give a lender a mortgage in a
refinancing deal, remember your cancellation rights. In home
mortgage refinancings, federal law gives you a right to cancel
for three days after you sign the papers. Exercise these rights
if you feel you signed loan papers and got a bad deal. Don’t
let the lender talk you out of canceling.
Get help early. If you begin to have
financial problems, or you are thinking of consolidating
unmanageable debts, get help first from a local non-profit
housing or debt counseling agency.
Ten Things to Think About Before Getting a New Credit Card
1. Don’t apply for a credit card until you
are ready. Unfortunately, bankruptcy may not have permanently
resolved all of your financial problems. It is a bad idea to
apply for new credit before you can afford it.
2. Avoid accepting too many offers.
There is rarely a good reason to have more than one or two credit
cards. Having too much credit can lead to bad decisions and
unmanageable debts, and it will lower your credit rating. This
can make it harder for you to get other lower interest rate
loans. Avoid accepting a credit card just to get a discount at a
store or a “free” gift.
3. Remember that lenders are looking for
people who run up big balances, because those consumers pay the
most interest. You may find that credit card companies are
pursuing you aggressively by mail and phone even though you filed
bankruptcy. Do not view this as a sign that you can afford more
credit. The lender may have a marketing profile telling them you
are someone who is likely to carry a big credit card balance and
pay a good deal of interest. Or they may see you as a good credit
risk because you cannot file a Chapter 7 bankruptcy again for
quite a few years.
4. Interest rate is important in choosing a
card but not the only consideration. You should always try to
get a card with an interest rate as low as possible. But it is
rarely a good idea to take a new card just because of a low rate.
The rate only matters if you carry a balance from month to month.
Also, the rate can easily change, with or without a reason.
Remember that even the best credit cards are expensive unless you
pay your balance in full every month. And other credit terms can
add to your cost, like annual fees, late charges, over-the-limit
fees, account set-up fees, cash advance fees, and the method of
calculating balances. Sometimes a credit card that appears
cheaper is actually more expensive.
5. Beware of temporary “teaser” rates. A
teaser rate is an artificially low initial rate that applies only
for a limited time. Most teaser rates are good only for six
months or less. After that, the rate automatically goes up.
Remember that, if you build up a balance under the teaser rate,
the much higher permanent rate will apply when you repay the
bill. This means that the permanent long-term rate on the card is
much more important than the temporary rate.
6. If your rate is variable, understand how
it may change. Variable interest rates can be very confusing.
Some variable rate terms can make your rate go up steeply over
time. Read the credit contract to understand how and when your
rate may change. And don’t be misled by advertisements that claim
“fixed rate,” as this may mean the rate is fixed only until the
lender decides to change it again.
7. Check terms related to late payment
charges and penalty rates of interest. Most credit card
contracts have terms in the small print for late charges or
penalty interest rates that increase if you make even a single
late payment. Try to avoid cards with late fees as high as
$25–$35 or penalty interest rates of 21–24 percent or higher.
Even if you are not having financial problems, these terms may
become important, because they apply equally to accidental late
payments.
8. Get a card with a grace period and learn
the billing method. It is important to understand how you will
be billed. Look for a card with a grace period that lets you pay
off the balance each month without interest. If the card does not
have a grace period and interest will apply from the date of your
purchase, a low interest rate may actually be higher than it
looks. The terms of the grace period are also important, as it
may not apply to balance transfers and cash advances. And look
out for different interest rates that may apply depending upon the
type of charge: these usually include a higher rate for cash
advances.
9. Don’t accept a card just because you
qualify for a high credit limit. It is easy to assume that
because a card offer includes a high credit limit, this means the
lender thinks you can afford more credit. In fact, the opposite
may be true. Lenders often give high credit limits to consumers
hoping that they think will carry a bigger balance and pay more
interest. You must evaluate whether you can afford more credit
based on your individual circumstances.
10. Always read both the disclosures and
the credit contract. You will find disclosures about the terms
of a credit card offer, usually in small print on the reverse or
at the bottom of the offer. Review these carefully. However, the
law does not require that all relevant information be disclosed.
For this reason, you must also read your credit contract, which
comes with the card. This will include terms such as late payment
fees, default rates of interest, and a description of the billing
method. Since these terms are not easy to understand, you may
want to call the lender for an explanation. Or better yet, refuse
credit with too many complex provisions, because those terms are
likely to work to your disadvantage.
Ten Things to Think About Before Using Your Credit Card
1. Establish a realistic budget. Before
using a credit card after bankruptcy, try paying cash for a
while. This will help you learn how much money you need each
month to pay the basic necessities. Don’t forget to budget for
the payments on any debts you reaffirmed in your bankruptcy.
2. It is important not to use credit cards
to make up for a budget shortfall. Credit card debt is
expensive. Sometimes credit cards are so easy to use that people
forget they are loans. Be sure to charge only things you really
need and plan to pay the balance off in full each month. If you
find you are constantly using your card without being able to pay
the bill in full each month, you need to consider that you are
using cards to finance an unaffordable lifestyle.
3. If you get into financial trouble, do
not make it worse by using credit cards to make ends meet. If
you find that you are using credit cards to get through a period
of financial difficulty, it is likely that additional credit will
only make things worse. For example, if you use cash advances on
your credit card to pay bills, the interest due will only add to
your debt burden sooner rather than later.
4. Don’t get hooked on minimum payments.
Credit card lenders usually offer an optional “minimum
payment” in their monthly billing. These are usually set very low
(usually 2 percent of the balance), barely covering the monthly
interest charge. If you pay only the minimum, chances are that
you will be paying your debt very slowly or not at all, and you
may think you are managing the debt when you are really getting in
over your head. For example, if you make only the monthly minimum
payments to pay off a $1000 balance at a 17 percent interest rate,
it will take over 7 years to pay your debt! If you are also
making new purchases every month while making minimum payments,
your debt will grow and take even longer to pay off. This means
that your monthly interest obligations will increase and you will
have less money in the monthly budget for necessities.
5. Don’t run up the balance based on a
temporary “teaser” interest rate. Money borrowed during a
temporary rate period of 6 percent is likely to be paid back at a
much higher permanent rate of 15 percent or more. Also be careful
about juggling cards to take advantage of teaser rates and balance
transfer options. It takes a great deal of time and effort to
take advantage of terms designed to be temporary. Remember that
all teaser rate offers are designed to get you locked into the
higher rate for the long term, because that is how the lender
makes the most money.
6. Avoid the special services and programs
credit card lenders offer to bill to your card. You are likely
to get many mail offers and telemarketer calls from your credit
card lender about special services such as credit card fraud
protection plans, credit report protection, travel clubs, life and
unemployment insurance, and other similar offers. These products
are generally overpriced. It is best to throw out and refuse
these offers, or at a minimum, treat them with a high degree of
caution. And avoid “free trial” offers as you will be billed
automatically if you forget to cancel the service.
7. If you can afford to do so, always make
your credit card payments on time. Be careful to avoid late
payment charges and penalty rates if you can do so while still
paying higher priority debts. Bad problems get worse fast when
you have a new higher interest rate and late charge to pay during
a time of financial difficulty. Most lenders will waive a late
charge or default interest rate one time only. It is worth
calling to ask for a waiver if you make a late payment
accidentally or with a good excuse.
8. Know exactly when the grace period ends.
The grace period usually ends on the payment “due date,” which
may change every month. Many lenders do not mail bills until late
in the grace period, so your payment may be due quite soon after
you receive the bill. This also means that the grace period may
be less than a full month, usually about 20-25 days. Some lenders
are slow in posting payments or have strange rules about deadlines
(like payments received after 10:00 a.m. on the due date are
considered late). Try to mail your payment well before the due
date so there will be no question it gets there on time. Paying
credit cards on time not only saves you interest and late fees but
is a good way to improve your credit rating after bankruptcy.
9. Beware of unsolicited increases by a
credit card lender to your credit card limit. Some lenders
increase your credit limit even when you have not asked for more
credit. Avoid using the full credit line as your debt can easily
spiral out of control. And going over the credit limit even by a
few dollars can be very costly as you will likely be charged an
over-the-limit fee and a higher penalty interest rate.
10. If you do take a credit card and
discover terms you do not like: Cancel! You can always cancel
any credit card at any time. Although you will be responsible for
any balance due at the time of cancellation, you should not keep
using a card after you discover that its terms are unfavorable.
If you're ready to start,
give us a call today! 877-ONE-DEBT
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