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Life After Bankruptcy

Life After Bankruptcy

     A bankruptcy case isn't rock bottom, it's a huge step up from whatever financial bottom you might have reached. Here's how to keep improving your finances after the "fresh start" that your bankruptcy case will provide you.

 

Your Credit Score is Important

 

     Having a good credit score is important, for several reasons. Obviously, the biggest reason is that a good credit score lowers the interest you pay when borrowing money, such as when buying a house, for example.

     Also, some insurance companies base your insurance rates on your credit score; some employers base their hiring decisions in part on your score; utilities base the amount of a security deposit on your score; among other reasons.

     Credit cards are a good way to rebuild your credit. But credit cards are likely one of the things that put you into bankruptcy in the first place. And how are you going to get a credit card with a bankruptcy on your report?

     When your bankruptcy case is done, all (with only a few exceptions) of your debts on your credit report show "Discharged in Bankruptcy." You're kind of like a teenager again, one that doesn't have much in the way of credit - what the industry calls a "thin file." Your credit is bad in part because you don't have much on your report to show how you'll handle credit going forward.

 

Using Credit the Right Way

 

     To build your credit score, you will have to USE credit. But you DO NOT HAVE TO PAY interest to build your credit. You don't have to pay anything, to any one, to rebuild your credit.

     So, you'll need to borrow money, and pay it back, to rebuild your credit. So even though credit cards might have gotten you in trouble in the past, you'll have to get back on that horse, but this time do it right.

     Here's how: Never buy anything on a credit card until you already have the money to pay for it. Period.

     Set up separate "sinking" accounts at your bank, one account for each credit card you  have, designated solely for paying off each card. Before you make any purchase on a credit card, make sure that you already have the money to pay for the entire purchase. There is no "I'm supposed to be paid Friday," or "I've just got to return this item." You either have the money, completely cleared in your account, or you don't.

     Then, as soon as the bill comes in for your credit card, pay the thing off, IN FULL, immediately. "Sink" that debt, paying no interest. Online banking makes all of this very easy to do from home anytime, day or night.

     Remember, you do have to use credit to rebuild your credit, but you don't have to pay interest or any other fee to rebuild your credit. Paying the credit card off in full, every month, builds your credit, without the additional expense of paying interest.

     The credit card industry calls a person who pays off their card every month a "deadbeat" (Google it - credit card deadbeat). This isn't because they're not making any money on you - they are, from charging the merchants you buy from - but because they're not making as much as if they were hitting you with 20+ percent interest on a huge balance every month. Be a deadbeat on your credit cards.

     In fact, you should never pay interest on a credit card again. Almost everything you buy on a credit card goes down in value after the purchase, so paying interest just makes things cost more than if you waited until you had the cash and then bought them.

     The same thing applies to a car. Sometimes a car loan is necessary, but you should avoid car loans for the same reason as credit card balances - cars drop in value after purchase, "like a rock." Interest just makes a car more expensive. Start making a car payment to yourself, and then in a few years, buy your next car with cash.

     A loan to buy a house is usually necessary, since most of us don't have enough cash to buy a house outright. But, houses (normally) go up in value, and even though interest also makes the house more expensive, the (normal) increase in house value makes it a worthwhile investment.

 

Real Life Examples

 

     Here's how this works. Say you need to buy groceries. Figure out by looking at your main bank account, and your budget, how much money you have available to spend on groceries. Then go to the store and buy that much, or less (NOT MORE), on the credit card.

     Then, as soon as you get back home, transfer the money from your main account to the credit card sinking account. With a "smart" phone, you can even do this before you leave the store.

     Or, say you're going to buy a new TV online. Figure out how much you have to spend by looking at your main bank account (and your budget). Shop around, then make the purchase on the credit card. Before you leave your computer, transfer the money from your main account to your sinking account.

     Then, as soon as the credit card bill comes in (or you get the e-bill notification), SINK THAT DEBT!

     Keep in mind that credit cards are not money. $3,000 of available credit on a credit card is not money. A "convenience check," which is just a convenient way for your credit card company to take your money, is not money. Only cash that is already in your bank account is money.

 

How to Get a Credit Card

 

     This part is easy. As soon as your bankruptcy case is done, you'll get credit card offers in the mail. There are two big reasons why:

     (1) Credit card companies know you just got rid of a bunch of debt, otherwise you wouldn't have filed a bankruptcy case. You don't have as much old debt competing for your income.

     (2) Credit card companies know you can't discharge any new debt in another Chapter 7 for eight more years.

     So, you're a pretty good credit risk at that point. But, because the credit card companies can gouge you with high interest rates, they will. BUT YOU'RE NOT PAYING ANY INTEREST, because you're always going to pay off every card, every month, so it doesn't matter what the interest rate is.

     Get the cards with no annual fees. You may have to pay an annual fee to start out, but not for long. You may also have to select a "secured" credit card, but the security deposit isn't a fee, it's still your money.

     A credit union can be a good place to get a credit card right after your bankruptcy case is done. They may give you a "regular" card, provided you buy a CD in an amount equal to the credit line on the card. It's functionally the same as a secured card, but helps build your credit faster, because it's more like a regular credit card.

     Either way, never pay interest on a credit card again.

 

How Your Credit Score Increases

 

     Just two years after completing a bankruptcy case, your credit score can easily be back in the 700s, which is generally considered acceptable for any lender, employer, utility company, etc. The fact of your bankruptcy will be on your report for 10 years, but a 700+ credit score makes that virtually irrelevant.

     But you do have to work at it. The key is to pay off your credit cards in full, every month. Your payment history makes up a third of your credit score (see myfico.com or similar sites). If you're putting all of your expenses on a credit card, AND paying it off every month, you'll have a perfect payment history over two years.

     Another big chunk of your credit score is your credit utilization ratio, which is how much of your available credit you are currently using. Again, if you are paying off your card every month, and thus only using 30% or less of your total available credit, you'll score well on this factor also.

     Much of the rest of your score is comprised of the length of your credit history (two years will make for a good start), and amount of recently obtained credit (get a few cards right after your bankruptcy and then avoid adding much more, especially those department store cards).

 

How a FICO Score breaks down

FICO credit score chart

(See www.myfico.com - learn how to use credit to your advantage and make things cost less, not more.)

 

Do It Right

 

     1. Paying off your credit card in full, every month, is the key to getting back to a healthy credit score, and keeping your budget healthy. This means never charging anything on a credit card until you already have the money to pay for it. You're just using a credit card as a purchase tool, not a source of money.

     As your credit score increases, you'll get better and better credit cards, cards that charge no annual fee and pay you cash back for your purchases. These will cause your use of credit to actually make things cheaper for you, rather than more expensive.

     2. And do NOT pay bank fees, for ANYTHING!!! It's not your job to make the banks money; it's your job to use your money in the best way for you and your loved ones.

     You should never have an overdraft fee. You should never have a minimum balance fee. You should never pay balance transfer fees (you should never have a balance to transfer). You should never pay ATM fees. You should never pay any annual fees (certainly once you get your credit score back up). You should never pay any bank fee, for anything. Ever.

     Learn the rules for your deposit (checking, savings, etc.) accounts and play by them, so that you don't get charged. Pay attention to your credit card balances and due dates, so that you don't get charged.

     You'll spend less, and save more, and not let the greedy banks get any of your hard earned money.

     3. Set up a budget. This means spending every dollar you are going to get next month, on paper, before you spend any dollar in real life.

     Figuring out where your money is going to go BEFORE it is actually gone is much better than fighting and crying over it AFTER it's gone, and after it's too late to fix anything.

     Pay yourself, and everyone in your household, an allowance. This way, everyone knows what money they'll have to spend on anything they want, while also knowing that all of the required bills have already been paid.

     --- PLAN where every dollar of income next month is going to go.

     --- TRACK every dollar you spend next month, as you spend it, to see where your money is going, and how much is left.

     --- REVISE your budget for the following month, before that month starts, to adjust for life's ever changing circumstances.

    --- REPEAT this process, every month, forever.

 

Get Frozen!

 

     Once your credit score gets above 650 or so, and therefore makes you a potential target for identity theft of your good credit, FREEZE IT!

     Freezing your credit keeps everyone else from being able to get new credit in your name. It is a very cheap insurance policy against identity theft, which is probably going to get much worse in the world, before it gets better.

     Freezing your credit means paying each credit bureau $10 ($30 total for all 3) to freeze your credit. Doing this online takes all of 15 minutes. Yes, this is a fee, but not to a bank, and well worth every penny. They'll issue you a secret PIN that must be used to "thaw" your credit, which you will do only when you apply for new credit.

     If someone did steal your identity, and racked up a lot of debt in your name, you'd have a part time job for a couple of years to straighten everything back out. Freezing your credit makes the theft of your identity in this way virtually impossible, since no lender is going to issue credit in your name without checking your credit reports. With your credit frozen, a lender can't make a "hard inquiry" on your credit, and thus won't issue any credit in your name.

     When you do want to apply for new credit, just "thaw" your credit with the bureau into which the lender is inquiring, for a few days, after which it will freeze right back up. This takes another $10, but again, it is very well worth it to know that you're not going to get a knock on your door from a police officer with an arrest warrant, because some criminal pretended they were you and stole your identity.

 

Enjoy Life

     Rebuild your credit, pay no interest or bank fees, budget your money, and freeze your credit. Take care of your finances, so that you can enjoy life and spend less time worrying about money.

 

For a FREE, 1-hour consultation

with Dale Orthner, call:

(916) 588-5011


 
Dale Orthner
(916) 588-5011