Monthly Archives: June 2016
Filing bankruptcy is an extremely stressful process. If you have filed bankruptcy, I’m sure many factors brought you to your decision. You’ve received advice from your attorney and now you have the discharge papers from the courts. Do take a few minutes to review those papers, making sure all notices have been properly filed and received by creditors. Be sure to store those documents in a safe place. While you won’t get them out to reminisce about them, you may need to refer to them if there is ever a question about an account that was included in this filing.
Many clients tell us that once the bankruptcy is complete, they will never apply for credit again. However, in today’s financial world, that may not be not realistic. You might need a card to make purchases online, to make a reservation, or should you need to cover an unexpected expense. You might also need a car or home and finance it over time.
You’ve been managing without credit card while your case was working through the court system. So now, rebuilding credit is just another step that you are ready to start.
# Perform a credit checkup. Obtain copies of your free annual credit reports by visiting AnnualCreditReport.com. Review your reports for accuracy. Accounts included in your bankruptcy should show that they have been discharged.
# Reestablish your creditworthiness. When you are ready to begin reestablishing your credit, consider a securing credit card. A secured credit card is safe alternative to a traditional card. With a secured card, you deposit a specified amount of money in a financial institution which then issues you a bank credit card. The amount you deposit becomes your credit limit. With timely payments, you credit limit may increase and eventually the account may no longer need to be secured by your savings.
# Start saving. set yourself a goal of establishing an emergency savings fund. If the task seems daunting, start small by aiming to save two weeks’ worth of pay in your account.
With regards to boosting your FICO financial assessments there are an assortment of procedures that will yield differing measures of change. Numerous individuals trust that getting negative data expelled from your credit reports is the main approach to expand your scores. This is right however just if the customer is effective at getting most, if not all, of the negative data evacuated. Getting one of your twelve accumulations evacuated isn’t going to do anything for your scores.
A much more actionable (and realistic) way to increase your scores is to pay off debt. Not only is this a proven way to earn better scores but also it’s practically immediate. Paying down debt can result in a better score in less than 30 days, which is lightning fast in the slow moving credit-reporting environment.
But before you crack open your checkbook you’ll want to consider WHICH debt you’re going to eliminate. Why? Because when it comes to improving your credit scores not all “debt elimination” is created equal. In fact, paying some huge debts will yield little to no score improvement while paying smaller debts can result in a meaningful score boost.
Using a scoring tool built by FICO, I recently simulated the following “pay off” scenarios and measured their impact to a FICO score of 630, which is clearly one that you’d like to improve. Nothing other than the following actions changed on the credit report.
1) Paying off a $250,000 mortgage
2) Paying off a $35,000 auto loan
3) Paying off a $5,000 credit card
The results are as follows…
Paying off a mortgage loan of $250,000 improved FICO 630 to FICO 635
I’ve been telling people for many years that installment debt, even in large amounts, doesn’t have much of an impact to your scores. This is the quantification of that advice. And while this is just a simulation, in 2010 I sold a house and eliminated a $249,000 mortgage and my FICO scores went up four points.
Paying off an auto loan of $35,000 improved FICO 630 to FICO 635
An auto loan is an installment loan (like a mortgage) and the effect of paying it off is equally unimpressive from a scoring perspective. Don’t get me wrong; it’s nice not having a monthly car payment. And, it’ll save you big bucks not paying interest on a $35,000 loan any longer.
Paying off a credit card balance of $5,000 improved FICO 630 to FICO 665
Eliminating the credit card debt resulted in the largest improvement to the credit score, and really it wasn’t even a close race. Credit card debt is scientifically proven to be a riskier type of credit for lenders to extend, which means even smaller amounts like what was used in the simulation can have a significant impact to your FICO scores. It also means if you can pay it off your scores will improve a lot, and very quickly. And even if you can’t pay off your credit cards 100%, your scores will still improve by paying it down as much as possible.
Growing great credit is a progressing procedure that begins with seeing how credit reporting works. While paying your bills is a crucial stride in the right course, there are other littler, lesser-known strides that are critical to setting up and keeping a perfect credit report and a decent financial assessment. Applying these means will go far in giving you the financial record you merit.
# Check your credit report for accuracy
Check your credit report regularly to ensure that the data included is accurate. While you want to look out for obvious errors, such as accounts that may have been opened as the result of identity theft, there are other smaller errors that may exist that can harm your credit. In addition, look at your name on the report to ensure that it’s accurate. Something as obvious as changing your last name from your maiden name to your married name could make a large difference in your ability to obtain credit, as your married name and maiden name may not be linked within your credit history.
# Establish credit history
Make sure that you actually have a credit history. Without any sort of credit history to go on, lenders have a difficult time evaluating whether or not you are a risk. Keep in mind that each individual has their own credit file and report, so spouses will each need credit cards and/or loans in their own name. If you don’t like the idea of having credit cards or loans, consider a secured credit card or a credit card with a low limit that you pay off every month, establishing that you are a reliable and trustworthy consumer.
# Stay loyal to creditors
Being loyal to your creditors is the next step. Creditors like to see a strong history so keeping cards open for a long period of time is beneficial to your credit score. While the first credit card you opened may not have terms as appealing as some newer cards, consider contacting your existing lender for better options rather than canceling.
# Find a balance
Make sure that you don’t have too much open credit. Lenders often look at your credit lines as potential liabilities, and this can hurt you. On the other hand, using a high percentage of your available credit can also be detrimental to your credit score. It’s essential that you develop a good balance.
# Pay bills on time
Pay your bills on time. When payments are delinquent, creditors report this information to the credit agencies, and it can harm your credit score. Timely payments of the minimum required payment or more shows creditors that you have a history of paying your bills on time.