Posts Tagged ‘debt’

Handling Credit After a Bankruptcy

December 1, 2010

Enduring a personal bankruptcy can be a very traumatic event in a person’s life.  Those who have faced this process often find they are extremely fearful of using any sort of credit, such as a car loan, mortgage or credit card, ever again.  However there are two critical steps that must happen to begin repairing the damage done to your personal credit.  We should disclose here that we are discussing a Chapter 7 Bankruptcy where debts are discharged and not a Chapter 13 Bankruptcy where debts are paid under a monitored repayment plan.

The first step is to make sure that your debts are fully discharged by your creditors.  At this point, there is no financial motivation for them to continue reporting to the credit bureaus so your credit report may still reflect a remaining balance owed.  This can easily be confirmed by requesting a copy of your credit report from all three credit bureaus.  Our website has information on how to do this.  If anything is incorrect, you will need to challenge the information.  Don’t let the sound of this intimidate you.  We also have details on how to handle this step with a sample dispute letter you can use on our website too.

The second significant step, and maybe the part that causes the most concern, is re-establishing your credit.  As scary as this seems, you cannot just ignore the financial world.  So many things are linked to your credit score like auto insurance and even future employment that you really can’t afford to ignore this.  Here are ten tips to get you started on re-establishing and maintaining good credit.  

  1. Apply for a credit card.  To establish a strong credit history you need a line of credit with consistent activity for at least 12 months after the date of discharge.  You don’t need a large line of credit or to charge high dollar amounts, just consistent use and timely payments.
  2. Make all your payments on time.  This not only includes lines of credit, but utility payments as well.
  3. Avoid late fees.
  4. Stay current on all payments.  Since you are starting over to rebuild positive credit there is little history to work with.  A single late payment on even a $20 balance can lower your credit score by as much as 100 points at this time.  The due date is when your payment must be received, not mailed.  Make your payments early whenever possible.
  5. Keep your credit card balances at less than 50% of your credit limit.  This is a little secret with huge implications. Staying below that 50% level has a strong and very positive affect on your credit score.
  6. Do not open new credit cards as a means of increasing your overall available credit.
  7. Review your credit annually.  You can obtain a free credit report once every 12 months from each credit bureau by visiting www.AnnualCreditReport.com
  8. Establish a realistic budget.
  9. As for help if you need it.  No one has all the answers, seek support if you have questions.
  10. Start now.

Facing a bankruptcy is traumatic, but it doesn’t have to define or limit you.  Our website has more details on these tips plus other information on building and maintaining your personal credit.  You are also invited to call us with your questions too at 866-982-9273.

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What exactly is a Credit Score (part2)

January 22, 2010

Last time we gave you some information on what components are included on your credit report.  This time we’ll dive a little deeper.

Part 2 – How is a credit score determined?

Have you ever wondered how that three digit number that so much of your life depends on these days is reached?  While no one outside of the organization that designed the number knows exactly, some basic information is known. 

Your credit score is a complex mathematical model designed by the folks at the Fair Isaac Corporation (FICO).  Three different credit bureaus use the data collected to determine an actual score based on this model.  The data is reported by creditors to these agencies – Equifax Credit Information Services, Experian and Trans Union National Disclosure Center.  (You can find links to these agencies on our website.)  A credit score can range from 300 – 850 where, the higher your score the less risk you represent.

Your score is based on five criteria that carry a different ‘weight’ in relation to the whole score.     

1)      Your history of payments accounts for 35% of your total score.  Payment history covers how you pay your bills and if there have been any collections, bankruptcies or judgments. 

2)      The balance and available credit on your accounts factor 30% into your score.  An account near the credit limit poses a much higher risk than one at less than 50% of the limit.

3)      The length of history on any account has a 15% weight.  The longer an account has been open and active, the more time you have had to ‘prove’ yourself. 

4)      The number and type of credit you have accounts for 10%.  More open accounts, has a potential for greater debt and therefore a lower score.  More variety of accounts though can show more experience with different types of credit and generally a higher score.

5)      New credit accounts for the remaining 10%.  Brand new accounts often signify new debt.  Multiple inquiries within a short timeframe can also indicate you are looking into taking on debt. 

In general, lagging payments and multiple new accounts can indicate a problem and therefore reduce your credit score.  The better you are at managing your finances and paying bills as expected, the lower risk you are and that translates into a higher credit score.