Rebuilding Credit (eventually)

[tpert]

I have filed for Chapter 7 and have completed the 341 meeting. I am hoping that the next steps go smoothly and without delay.

I have a question about rebuilding credit.

I am assuming that this should be a slow and careful process once the discharge and closing occur.

Are there any guidelines anyone knows for how to best proceed at that point? Are there useful websites that someone can share?

I am not in any hurry, but have been concerned about the number of "pre-approved" credit card offers that have been coming. I am not even considering any of these until some time after my case is closed. Why would they even send these while my case is open?

Is there a right amount of time to wait before starting to re-establish credit?

Is three months after closing too soon? Would six months after closing waste precious time?

It is strange that I am beginning to think of the future again as if there may be a future. I have not done that in a few years.

I am not looking to go into debt right now, but my two old cars have a total of nearly 500,000 miles on them. I do not expect either to last more than another 50,000, so when I am down to one, I will want to replace that with something else that will hopefully run forever (like these have), but I would want to build up my credit again before that need occurs. My current hope is that I won't need a car for 4 or 5 years, so I think I have time.

Thanks.

[shipo]

tpert, congratulations in advance on your pending discharge!

The following is kind of a distillation of various bits of post-discharge advice (from my "do as I suggest, not as I did" department) I've helped other folks out with:

Following your discharge:

• Wait 6 weeks and then get copies of all three of your credit reports from annualcreditreport.com
• Go through those reports with a fine-toothed comb and make sure all accounts which were open when you filed for bankruptcy are not showing some sort of an IIB (Included In Bankruptcy) notation and the amount owed is $0.00.
• Once you confirm all of your discharged debt is properly reporting, you can start applying for credit (technically you could have started the day of your discharge, but it is best to let the dust settle a bit first; some folks get approved right away, others, me included, get lots of rejections).
• CapitalOne is a good first stop for credit; of late they have been widely reported to grant their Quicksilver 1.5% cash back card to those with fresh discharges, and often the starting unsecured credit limit is $3,000.
• If you can afford it, I would also recommend a “high limit” secured card with a $5,000 limit (and identical security deposit). Getting such a card helps from the perspective of you showing a high(ish) limit card on your credit reports, it can also be handy when the card graduates to unsecured as the limit will remain unchanged, you’ll just get your security deposit back. Good secured card financial institutions include, but are not limited to, FNBO, TDBank, NFCU, Discover, and of late, US Bank.
• With two cards in hand, you’ll still want a third as three cards is widely considered to be the minimum number to have to help your credit scores. Credit Unions are a good place to look for this card, I got my third from PenFed.
• The next decision you’ll need to make is what to do about an installment loan; you’ll need a minimum of one for credit score improvement purposes. A mortgage, car loan, or personal loan all qualify as installment loans; if you don’t have either a mortgage or car loan, a good starter installment loan is an SSL (Secured Share Loan) from the likes of NFCU or PenFed.
• With three credit cards in hand, and an installment loan, your next stop should be into the proverbial garden, basically, let the credit accounts you have age and watch your scores grow; hang out there for at least a year and you’ll be much better able to score car loans and mortgages at good rates.

[tpert]

Wow! This is exactly the kind of information I was trying to learn.

Thanks for the tips.

I think the credit card advice is in line with what I was thinking. However, I never thought about the installment loan.

I currently have a mortgage and a small second mortgage that I am continuing to pay, but my lawyer suggested I not reaffirm either during bankruptcy. I expect to continue to pay both but not reaffirm either of them at this time.

Would it make sense to at least reaffirm the second mortgage while it is being paid off (I have 1½ more years of payments). It seems that doing so would help my credit score if I am understanding your response correctly, since they would then be sending information to the credit agencies.

Thanks again.

[justbroke]

shipo maybe make this a sticky?

[shipo]

shipo maybe make this a sticky?

Hmmm, not a bad idea; should I start a different thread with that info as the first post and then mark it with a sticky?

[shipo]

Would it make sense to at least reaffirm the second mortgage while it is being paid off (I have 1½ more years of payments). It seems that doing so would help my credit score if I am understanding your response correctly, since they would then be sending information to the credit agencies.

Interesting question, justbroke, do you have any thoughts?

[justbroke]

Would it make sense to at least reaffirm the second mortgage while it is being paid off (I have 1½ more years of payments). It seems that doing so would help my credit score if I am understanding your response correctly, since they would then be sending information to the credit agencies.

The golden rule of reaffirmation -- at least from what we keep hearing -- is to never reaffirm a debt that you don't need to reaffirm. Never reaffirm for "credit."

But, that's up to each individual to decide whether it's in their best interest. Your attorney may still check that it is a hardship, it may go to a hearing, the judge may still say it's not in your best interest and deny it. (At least there are a couple of bankruptcy judges that are smart and do that -- denial of reaffirmation -- for any debtor that attempts to do so. your mileage may vary in New York.)

[tpert]

My attorney advised me continuing to make payments without reaffirming due to the apparent financial benefits of not reaffirming. However, since I plan to keep my home, he likewise advised me to continue making payments.

I can somewhat understand the issue with the primary mortgage with well over a decade remaining. However, obtaining an installment loan would likely have a higher rate than the second mortgage and have required payments. The only difference would be that it is not secured with my home (which is why he wants me to continue to make timely payments on it, even though it is not reaffirmed).

Thus my question becomes more that since I am paying it anyway and the payments are easily handled and I have the loan already, I am thinking that it would be just as good to reaffirm the second mortgage rather than try to obtain and pay off a new loan (if it would have the same affect on my credit rating as a new installment loan).

I will likely keep things as they are and not rock the boat. As I indicated, I am not looking to start any major new debts right now.

[5yrplan]

Why bother credit is not necessary. Once you have the clean slate begin a debt free life. Say never again to debt except for a mortgage.

[shipo]

Why bother credit is not necessary. Once you have the clean slate begin a debt free life. Say never again to debt except for a mortgage.

Why bother? Simple, using credit wisely will make you more money than you otherwise have.

[5yrplan]

Epic fail, debt is never good or smart.

[shipo]

I'll tell you what isn't smart; not understanding credit and how it can work for you. Case in point; prior to June of 2020 I'd never had a "Rewards" credit card before, and as logic would dictate, I never earned even $0.01 in rewards. Since that time I've earned $338.34 on my PenFed card, $253.60 on my CapOne card, and $432.81 on my TDBank card; and before you say it; in that time I haven't paid a penny in interest. Long story short, I've earned over one-thousand dollars in cash rewards simply by using credit versus being "debt free" and making the exact same purchases with my debit card.

So, please explain o wise sage, how is the above neither "good" nor "smart"?

[eap82]

I do on an intellectual level understand what you are saying. What I don’t think everyone understands is that getting caught up in the rewards card game for some is a slippery slope. It’s easy to justify spending to get the rewards and get yourself in trouble. Now this could obviously be avoided by budgeting properly but many bankruptcies are filed because of poor budgeting. Some people are also impulsive shoppers or have issues spending money because of other medical diagnoses. My point is this, I see both the point that any debt is a bad idea as well as using rewards cards responsibly. It really just depends on the person.

My personal situation is that while I have one card still open that has survived filing chapter 13 I have to daily remind myself not to use it. I keep it to have my credit score in decent shape during this bankruptcy because it has a perfect payment history and is helping me but am seriously considering canceling it. I had some of the best rewards cards out there, I even felt good about myself for having height credit limits into the 6 figures on these high end cards and “made money” on them. Then it got out of hand and on top of it I got sick and it all went to hell. Personally, I will do everything I can to keep myself from getting caught up in the rewards trap. I’m no Dave Ramsey enthusiast but there is something to be said for owing no one anything and living without debt if you can’t manage it responsibly.

[Clambert1273]

Agreed and I think most also do not understand credit does not equal debt. It is smart to rebuild correctly & be better than before IMO

[vet2019]

Wow! This is exactly the kind of information I was trying to learn.

Thanks for the tips.

I think the credit card advice is in line with what I was thinking. However, I never thought about the installment loan.

I currently have a mortgage and a small second mortgage that I am continuing to pay, but my lawyer suggested I not reaffirm either during bankruptcy. I expect to continue to pay both but not reaffirm either of them at this time.

Would it make sense to at least reaffirm the second mortgage while it is being paid off (I have 1½ more years of payments). It seems that doing so would help my credit score if I am understanding your response correctly, since they would then be sending information to the credit agencies.

Thanks again.

Yeah don't reaffirm mortgage. Reaffirming any debt won't help rebuild credit as it's still reported as derogatory/IIB even after reaffirming. The mortgage is discharged in bankruptcy and you keep the house by keep paying for it. 10 years later, you can still walk away from the house without negative effects.

Coming up on 3 years post-discharge. Scores are 700-720ish. Probably would be higher but I have shopped around a lot for credit and have opened and closed a number of cards. Unless you burned them, Capital One, Discover, and credit unions tend to be the best options for credit cards and/or auto loans. Also, I have a lot of inquires because I shop around; I find the trick to be put 2-3 months in between a series of inquires; this allows others to see whether or not you opened any accounts.

Don't wait. You can more than likely get a Capital One card 30 days post discharge. They have a pre-authorization tool. If they don't approve you for any regular cards, opt for their secure card. 6 months later, you will likely get approved for one or more of their other cards. I got a Discover card around 2 years post filing. Outside of that, I recommend finding small credit unions. Also, recommend using Credit Karma; it's free - been using it since discharge.

I had reaffirmed the auto I had and totaled it around a year later. My first auto loan 1 yr after discharge I was around 8% with Toyota. Refinanced around a year later with PenFed at 6%. 3 years post discharge, just traded it and bought another at 4.3 and immediately turned around and refinance at 2.3% with small local credit union.

For the haters, credit is tool just like cash.

[tpert]

Yeah don't reaffirm mortgage. Reaffirming any debt won't help rebuild credit as it's still reported as derogatory/IIB even after reaffirming. The mortgage is discharged in bankruptcy and you keep the house by keep paying for it. 10 years later, you can still walk away from the house without negative effects.

Coming up on 3 years post-discharge. Scores are 700-720ish. Probably would be higher but I have shopped around a lot for credit and have opened and closed a number of cards. Unless you burned them, Capital One, Discover, and credit unions tend to be the best options for credit cards and/or auto loans. Also, I have a lot of inquires because I shop around; I find the trick to be put 2-3 months in between a series of inquires; this allows others to see whether or not you opened any accounts.

Don't wait. You can more than likely get a Capital One card 30 days post discharge. They have a pre-authorization tool. If they don't approve you for any regular cards, opt for their secure card. 6 months later, you will likely get approved for one or more of their other cards. I got a Discover card around 2 years post filing. Outside of that, I recommend finding small credit unions. Also, recommend using Credit Karma; it's free - been using it since discharge.

I had reaffirmed the auto I had and totaled it around a year later. My first auto loan 1 yr after discharge I was around 8% with Toyota. Refinanced around a year later with PenFed at 6%. 3 years post discharge, just traded it and bought another at 4.3 and immediately turned around and refinance at 2.3% with small local credit union.

For the haters, credit is tool just like cash.

Thank you for your post. It will be prove to be very helpful.

For the haters, I would agree that if I were a spendaholic, credit would not be a good idea, in the same way that a drink could cause problems for an alcoholic. Even then, an insurance agent once cautioned me that if I don't drink (which I seldom do) it would be better to list "1-2 drinks a week" on an application, if I could be doing that, since statistically total nondrinkers are considered a greater risk than light drinkers (because of the possibility that it is related to an underlying medical issue or possibly an alcoholism background).

Credit worthiness is not synonymous with debt. Debt is not the goal. No credit may be better than bad credit, but positive credit worthiness is not the same as being in debt.

My financial issues came from nearly four years of unemployment (long story, short--let go due to age by a major bank) which cause me to use up all of my retirement funds while paying for a mortgage, family medical coverage, and Parent Plus Loans for my daughters' education. I had up to four simultaneous part-time jobs at a time while trying to make ends meet and amassed thousands of dollars in debt to banks and the governments. Prior to that I had been paying down credit card debt in the hopes of retiring by 2021 (when I had expected to pay off the Parent Plus Loans). Now, I have my sights on 2030 if I live that long.

After nearly 4 years of unemployment and 3 years of trying to pay this stuff off, I have three major appliances which have fallen into disrepair and my cars have failed on the road 4 times in the past year. Thanks to the bankruptcy, I have the cars in good working order and I could finally afford parts and spent Christmas Eve fixing the stove and Christmas Day taking apart the Washing Machine. I am not looking forward to having a car loan, but may be forced to in a few years. Even though both cars are now running well, they each have over 200,000 miles on them.

Debt is not necessary, but credit worthiness is. However, you cannot demonstrate credit worthiness (especially after bankruptcy) without a demonstrated history. That was the point of this thread, not going into debt.

A lot of people are not aware that credit worthiness is becoming a standard part of an employment background check. Want to lease a car? They will do a credit check. Want Life Insurance? Most carriers will perform a credit check. Looking to rent an apartment? Don't bother without a reasonable credit report. Likewise, many medical providers do not handle payments over time directly but rely on third parties like Care Credit to spread out the payments (another credit check).

I agree that for some, restoring credit worthiness will lead to burdens of debt, but that should be a different thread since that was never the intent nor purpose of this discussion. (The thread title is "Rebuilding Credit" not "Amassing Debt.")

[shipo]

eap82, you wrote:

I do on an intellectual level understand what you are saying. What I don’t think everyone understands is that getting caught up in the rewards card game for some is a slippery slope. It’s easy to justify spending to get the rewards and get yourself in trouble. Now this could obviously be avoided by budgeting properly but many bankruptcies are filed because of poor budgeting. Some people are also impulsive shoppers or have issues spending money because of other medical diagnoses. My point is this, I see both the point that any debt is a bad idea as well as using rewards cards responsibly. It really just depends on the person.

My personal situation is that while I have one card still open that has survived filing chapter 13 I have to daily remind myself not to use it. I keep it to have my credit score in decent shape during this bankruptcy because it has a perfect payment history and is helping me but am seriously considering canceling it. I had some of the best rewards cards out there, I even felt good about myself for having height credit limits into the 6 figures on these high end cards and “made money” on them. Then it got out of hand and on top of it I got sick and it all went to hell. Personally, I will do everything I can to keep myself from getting caught up in the rewards trap. I’m no Dave Ramsey enthusiast but there is something to be said for owing no one anything and living without debt if you can’t manage it responsibly.

Sorry, the discussion on using credit as a tool and the discussion regarding folks who cannot use the tool properly are two very different things. Think about it this way, you know using a chainsaw can cause you to lose an arm or a leg, or even your life, but you use it anyway when the need/want/desire arises. The same holds true for credit.

In the Rewards scenario I painted above, the earning of those rewards had absolutely nothing to do with the rewards themselves, I would have purchased the exact same items and services regardless of whether I had any credit available or not; they were just a fortunate byproduct of the fact I used a credit card versus a debit card.

There are other anti-Ramsey scenarios where using credit as a tool can be highly beneficial; one such is buying a car, new or used, it matters not. When buying a vehicle, your options are to pay cash for it, either from money which could be invested, or taking money out of investments, or borrowing the money; given auto loans are typically offered with interest rates which are a fraction of the typical returns on investments, you will virtually always come out ahead by borrowing the money than paying cash.