Rebuilding my credit after bankruptcy

June 1, 2012 7:48 PM

Chapter 7 bankruptcy will be discharged in 60 days. What should I do to start rebuilding my credit?

My case will be discharged in 60 days. I'd like to know the best way to start building up my new financial life.

Couple of details:

1) I'm in a pretty good financial position with regard to income/expense now that my debts have been discharged. I make about 50k a year and pay about $900 for rent/utilities/ect. Other than a cell phone bill, $100 for student loan payments, $380 for a car and insurance, I don't have any fixed expenses.

2) My 2006 sedan is beginning to act up a bit. I have about $3500 in equity off the blue book value even with repairs. A new, more fuel efficient vehicle would be nice. Is it advisable to purchase one soon after a bk? I can afford the $285 a month I'm paying on my car now. I realize my interest rate will suck, but I've heard re-financing after 6 months or so of payments can be worthwhile and used car prices are quite high right now. Is this realistic?

3) Are any of the card offers I'm being inundated with worthwhile? A specific card or company would be appreciated. I've for sure learned my lesson about debt and will not be making the same mistakes again, but I'm 29 and realize credit is an important tool. Also, car rentals, hotels, and work expenses make CCs a bit of a necessity.

posted by anonymous to work & money (14 answers total)

You seem to be a bit inclined to spend, so you should really default to not spending money unless you have a really, really good reason for it. Usually meaning that it'll save you money, or you need it to live. You obviously don't need a newer car in order to live, although if your car is unsafe, you might. Be honest with yourself about whether it's unsafe or simply needs a tune-up and you're sick of it. More fuel efficient might pay for itself depending on sales taxes, how inefficient your current car is, etc. Or it might not and you might be better off sticking to your current car. If you do decide getting another car is worth it, then your default should be a used car. Used car prices might be high compared to where they were in the past, but they're still cheaper than new cars. Unless you have a compelling reason to get a new car, you're throwing money away, even if you can find ways (via refinancing) to throw slightly less money away after 6 months.
posted by the young rope-rider at 8:15 PM on June 1, 2012 [1 favorite]

OK, this is my opinion, but I will state it in absolutes.

2) Do not get a new car. Don't do that. Keep your car and keep it maintained. This car is not even paid off yet? You do not replace that car until 2016, unless it gets crushed somehow. This is off the table, do not even think about it. Instead of a car payment, save that money/use it for repairs/use it to save for your next car - in 2016.

3) Get one Visa and one Mastercard, if you have the offers. Pick the ones first from major banks only - lots of tiny "companies" prey on bankruptcies - with no annual fee, and, for any ties after that, the lowest interest. If they all have annual fees, pick the lowest. The annual fee should be around $29.99. Shred any offer with an annual fee over $50. If you have an offer fitting these qualifications, the actual bank doesn't matter much as long as it is a major bank or regional/local bank in your area. The card brands may be strange brands used by major banks which mark you as having a bankruptcy. That's OK. Look closely to find the real bank behind the card name.

The credit card interest rate doesn't matter to you now because you will always pay it off in full each month, RIGHT? Use one and keep the other at zero. Use the one to buy your gas and small stuff, and internet orders if you must, and only enough that you can always pay it off the same month. You can alternate the cards every three months, but there better be a day every three months where all the balances are ZERO.

After just a year or two of this and your new perfect payment schedule, you will get better credit card offers from the major banks using their real brand names (likely the same banks that own the cards you have). But you might stay with the cards you have, because they took a chance on you, and you can just ask that the annual fees be dropped because you are a perfect customer.
posted by caclwmr4 at 8:27 PM on June 1, 2012 [3 favorites]

After filing for bankruptcy you can expect interest rates on a car loan to be 20% or more. Keep your car.
posted by Linnee at 9:54 PM on June 1, 2012

I disagree with the "major banks only" idea. Isn't MeFi land of the credit union lovers? No fees and the lowest interest possible, though really, you're only going to use this card and pay it off un full at the end of the month meaning the interest rate doesn't really matter, right?
posted by Brian Puccio at 10:09 PM on June 1, 2012 [1 favorite]

My opinion is to not finance anything at all for seven years. You will end up paying ridiculous premiums in the form of interest for very little benefit.

I ruined my credit a while back (but did not declare bankruptcy). I just paid cash for everything for a long time. I didn't need a credit score so I didn't worry about one. I did buy a car after a few years, my rate was not very good (about 10%). I paid it off early.

I eventually, six years after defaulting on several loans, bought a house. I had to hire a mortgage broker because otherwise no one would have approved me for a loan. The broker helped me do all the right things to work around my bad credit history. The house is currently (after refinance) financed at 3.875%. I did pay an extra 1% for the house to cover the broker's fee. How much time and effort are you willing to put into potentially saving 1% on a house years down the road?

What I'm really asking is - what is it that you need credit so badly for? Is it worth the effort or expense that you will incur trying to build potentially useless credit? For me, it wasn't. All I needed was time.
posted by tylerkaraszewski at 10:40 PM on June 1, 2012

Supposedly there hacks for this. I don't know them.

As someone who declared bankruptcy after credit fraud a few years ago, I agree on the all cash strategy.

However...

It's likely you would not qualify for an Amex card (I have the blue cash one that gives 5% back on grocery stores, pharmacies like cvs, and gas) but if you could get one, then you could do what I do and put every bill on that card and pay it off monthly and in total.

I believe the Bank of America debit card now gives 5% back, too, but they probably have all types of shady policies and you'll end up paying crazy fees.

My advice? Switch to a credit union, get away from shady Big Banks and other fianancial rip-offs, and live your life within in your means.
posted by jbenben at 11:44 PM on June 1, 2012

You've discharged a bankruptcy. That means you have no debt and can't declare bankruptcy again for several years. And that actually makes you a pretty good credit risk.

The most important feature you can get in a credit card is a feature that automatically pays the balance in full using a transfer from your checking account. Some banks don't have this. You might think you can also do it using your checking bank's bill pay service, but then it misses your due date by one day and you suddenly owe late fees and interest. Make sure the credit card can pull payments from your checking account.

Although people hate on the big banks, in fact they have the best offers. Chase will give you $100 just for opening a Freedom card! And that card has no annual fee, a 15-month 0% intro rate, and gives you up to 5% cash back on purchases.

However, if you owed Citi any money in your bankruptcy, you can forget about ever getting a card from them again. Those mofos hold a grudge, and they like to torment you by sending you great offers for cards they won't give you.
posted by kindall at 12:06 AM on June 2, 2012

Chase is the devil. B of A is right behind them. Wells Fargo is the worst of a bad lot.

You will have a Clean Slate. Put your money somewhere safe, an institution or organization that is not out to rape you financially.

That is all.
posted by jbenben at 1:15 AM on June 2, 2012 [2 favorites]

It'll take a year or two of responsible credit use to get your score back to some semblance of normal. There are a few creditors who won't deal with you, and if you want to buy a house you may have to answer some questions about how you got into trouble and why they should believe you're not going to get back into it. There has been good advice above about selecting an offer. You can get a vague idea of each lender's scoring standards by looking at the database over at creditboards.com. You don't want to waste time (or inquiries) applying for cards you have no chance of actually getting.

Once you've made use of the not-as-terrible-as-possible credit card offers and kept up good payment/utilization for a year and your credit score comes back good, you can think about starting to troll around autotrader and craigslist for a 2-3 year old used car at a good price, if you feel the need to drive something newish. They're not really worth it, but you can get decent extended warranties for $1000 or less if the other alternative is buying new and spending far more than the extra $1000. You really shouldn't do this until your score recovers, which will take a while.

You really don't want to be stuck at 14.99% or more on a car loan. Even if you buy a $16,000 car you're looking at nearly $400 a month on a 5 year loan. At current reasonable credit rates you could pay less per month and have it paid off a year earlier, saving over $5,000 merely by waiting a year. Even if you refi after merely one year, you've already paid over $2,200 in interest while only paying $2,300 in principal! Not only that, once you're finished with that you still have to pay off the rest of the car, which you've made little progress on paying off. Do you really want to pay $1,400 more in interest for $1,400 less of the car you're trying to buy? That's 6% of your pay.

The key is to be deliberate about the decision. Don't put yourself in a situation where you feel like you have to buy a car. Commit to fixing the current one for at least a year, unless you can make enough money from selling it to combine with some excess savings and buy another car in a cash deal. The nice thing is that you have (at least some) positive payment history on your existing car loan. That will make it easier (and cheaper) to get another car loan down the line, but not yet.
posted by wierdo at 2:48 AM on June 2, 2012

Keep your current car --- it's only six years old and not even paid off yet! While a new car might be more fuel efficient, the increased car payments would more than outweigh that fuel cost savings. As caclwmr4 says, don't even THINK of getting a new car until 2016.

Do NOT get more than one credit card, no matter where you get it from --- then pay cash for anything and everything you can, and pay that credit card off in full every. single. month. And only use that credit card when you have absolutely no other options: not for gas or groceries or a night out at the bar, not for ANYTHING you could pay for with cash.

You say you've learned your lesson about debt, but it sounds more like you're already planning to ramp up your spending and debt levels. That's the kind of thinking that got you into bankruptcy in the first place!
posted by easily confused at 3:27 AM on June 2, 2012

Are any of the card offers I'm being inundated with worthwhile? ... I've for sure learned my lesson about debt and will not be making the same mistakes again, but I'm 29 and realize credit is an important tool.

The fact that credit is an important tool has nothing to do with credit cards. Credit cards simply should not be part of your debt "toolkit", especially under your circumstances.
posted by deanc at 5:02 AM on June 2, 2012

deanc: "The fact that credit is an important tool has nothing to do with credit cards."

Actually, it has a lot to do with it. For better or worse, banks here in the US (yes, I'm assuming the OP is from the US) have largely decided that the best measure of whether you'll pay back a loan in the future is whether you have used credit cards responsibly. You really want two or three eventually with decent enough limits that the monthly float that you use is less than 20% of your available credit.

A friend of mine was bitten by this. He's terribly anti-credit card, for completely understandable reasons. However, despite having the assets (if not cash in hand) to put up extra collateral for his three(!) car loans, his scores remained in the toilet and he paid too much for the car loans (all from his bank, not some scammy dealer subprime offer, although he did check to make sure he couldn't get better deals there) and on his mortgage, which he probably wouldn't be able to get today; he bought in 2006, when banks would throw money at anyone. Luckily for him, he had the willpower necessary to choose a 15 year loan and is now more than halfway through it despite paying 1.5% more than he really should have had to, at the cost of over $10,000 in extra interest charges over the life of the loan, and that's with a (significantly) less than $100,000 loan!

Finally, about 5 years ago I convinced him to take the credit card offers while they were still available to him. He ended up with three, which he only rarely carries a balance on. Recently, having been responsible with them, he was able to buy a car at an excellent rate. The downside, of course, is that he is continuously bombarded by offers to please borrow more money.

The worst bit is that so many insurers and others use credit to determine rates or whether you'll have to leave a deposit and things of that nature that you get dinged for your bad (or not great) credit all over the place. I avoided around $1500 worth of utility deposits when I moved just because I had decent credit. Plus my car insurance is about 10% cheaper than it would be without the rate adjustment for a decent score. (The score would be better, but for reasons specific to my personal situation it's better to leave the low rate balance transfers where they are and use the money that could be paying off those cards elsewhere)

That said, a person has to know themselves. If they can't be responsible, they need not to take cards with high limits. Banks usually don't have a problem reducing your credit line if you ask. It sounds like the OP should be able to easily save 6 months expenses plus a couple of thousand dollars to cover any credit card mistakes. (It seems rather unlikely the OP will get more than a couple of thousand in credit lines at this point)

What I don't like is the OP's desire to buy a brand new car. Unless it's a Kia Rio or something really cheap (or the manufacturer incentives are freakin' incredible, which they aren't on fuel efficient cars these days) it's a bad idea. Even then it's a bad idea, but there's much less to lose.

Also, OP, shop for different insurance unless you know yourself to be in a high cost area. My SO pays $70 a month for 100/300/100 plus comprehensive and collision with a $500 deductible on a 3 year old performance SUV. And that's with my maleness driving up the rate. ;) Other companies were between 50% and 100% more, so it does pay to shop all the companies available to you.
posted by wierdo at 2:54 PM on June 2, 2012

The downside, of course, is that he is continuously bombarded by offers to please borrow more money.

It's extremely easy to opt out of these, just for what it's worth.
posted by kindall at 12:06 AM on June 3, 2012

wierdo, maybe I misinterpreted his point. I read it as not saying that having a credit score was a useful "tool" (it is, and that I agree with), but that he was arguing that consumer credit itself is an important tool. Stuff you put on a credit card is fundamentally not the sort of stuff you should take out loans for. It's not that it doesn't happen, but it's more of an "unavoidable circumstance" rather than "an important tool."
posted by deanc at 6:09 AM on June 3, 2012