How to Choose A Lender
Establishing Credit After Filing Bankruptcy
You can get credit again after filing bankruptcy.
Bankruptcy is intended to give you a fresh financial start and the ability to rebuild credit after bankruptcy is part of that new start.
However, the process you must follow to rebuild credit after bankruptcy can be full of pitfalls.
- Don't take out loans or use credit unless you can afford the payments. That may sound obvious, but well-intentioned consumers make the mistake of taking out loans they can't afford to pay every day. Don't let your credit activity be need-driven, and don't get so eager to rebuild credit after bankruptcy that you feel you have to jump into the first opportunity. Figure out whether or not you can afford the payments exactly. Don't just generalize, thinking that you seem to have a bit of money left over at the end of the month these days and so you can probably afford another payment. You're going to need detailed information to take out a new loan with confidence:
- Check your budget (and if you just thought, 'What budget?' stop here and create one before you even consider applying for new credit). Figure out how much you can afford to add for the loan payment.
- Find out exactly how much the payments on the new account will be. The lender should be able to tell you the exact amount of the payments. If the lender seems reluctant to do so, that's a warning sign-don't commit without knowing exactly what commitment you're making.
- Compare the amount of the payment to your available income. Available income in this context means reliable income that is not committed to another area of your budget. Do not factor in things like, 'I'm probably going to get a raise next month, so it shouldn't be a problem after that...'
- Don't forget to leave a cushion-some of your income has to be budgeted for savings/emergencies, so if this new loan payment means you're spending all of your monthly income, you can't afford it.
- Beware of hidden and excessive costs. There are reputable lenders who specialize in offering second-chance loans-at higher interest rates-to consumers who have low credit scores or have filed bankruptcy. But not all lenders are reputable. When you've filed bankruptcy and know that your credit options are limited, you may be tempted to accept terms that would otherwise seem unreasonable. Lenders know that, too, and some will take advantage of post-bankruptcy clients with unnecessary fees, crippling late-payment charges, and hidden costs. It's critical that you choose your lenders carefully. In many ways, it's more critical after bankruptcy. After all, your credit score already needs work-late payments or accounts in default can significantly delay that process When you're talking with lenders, be sure to:
- Find out exactly what fees and costs are associated with the account. Don't be lulled into a false sense of security by terms like, 'No up-front costs.' Many credit cards that target post-bankruptcy and low-scoring consumers add these 'processing charges' and 'annual fees' directly to your account-which means that you may receive a credit card with a $250 credit limit and $175 or more in charges already made to the account.
- Know the penalties for late payments and going over your credit limit. Often, one late payment can send an account like this spiraling out of control. You miss a $50 minimum payment, and then a $35 late charge is added. Because your new credit limit is low, the late charge puts you over your credit limit, triggering another $35 charge-which, of course, puts you further over your credit limit. By the time your next statement rolls around, your $50 minimum payment has turned into a request for $150 or more to 'bring your account current.' And if you aren't able to make that payment, it just keeps growing. For many post-bankruptcy consumers, that scenario is all too familiar. There's no room for that kind of error when you're trying to rebuild after bankruptcy, so be very certain that you know what kind of charges may apply and what circumstances might trigger them.
- Read the entire agreement carefully. It's true that most people don't read the fine print in all of their contracts, but it's a gamble-and it's all the more dangerous when you're dealing with the high-risk lenders. Remember that companies making loans to low-credit-scoring and post-bankruptcy consumers are taking a chance-and they're not going to take that chance without a significant payoff. Read and understand the entire agreement, and if you don't understand something, ask questions until you do.
- Watch out for these common 'predatory' practices: People who have filed for bankruptcy are often targeted by predatory lenders, because those lenders know that post-bankruptcy borrowers have fewer options, and that they may be so relieved to discover that they've qualified for a loan after bankruptcy that they won't be inclined to ask too many questions. Many consumers accept that because they think accepting extortionist terms is the only way that they'll qualify for credit after bankruptcy. It's not true. Hold out for a reputable post-bankruptcy lender.
- Bait & Switch: The lender advertises or sends you a 'pre-approval' for a loan or credit account with certain terms, but then changes the terms. One way this sometimes happens without the consumer noticing is that the loan will have a variable interest rate or the interest rate will change after a fixed time period. Make sure that you understand the terms of your loan exactly, and that you see them in writing.
- Loan Packing: Be cautious when a lender starts suggesting-or insisting-that you need additional items or services. If you're buying insurance or other services to go along with your loan, make sure that you understand exactly what it's for and whether it's truly necessary.
- Equity Stripping: This occurs in home-refinancing, and the best defense is to walk in knowing exactly what you want. If the lender tries to encourage you to take additional cash out, lowering the equity in your home and converting it to cash, beware. Not only will this increase your payments, but it may make your house more susceptible to foreclosure.
- Loan Flipping: Repeated home refinancing can be very costly. Some lenders will encourage you to refinance repeatedly, each time taking additional cash out of the house. In addition to the risk of equity stripping, you may be charged large fees on each transaction. And, you may even end up with a higher interest rate (and therefore, higher payments) than you had on your original loan.
- Check out the lender. The maze of governing and overseeing bodies for various lending institutions in various states can be difficult to follow, but fortunately there are government agencies to help you sort it all out. When you're dealing with a bank, you can get information about regulations and about where you can complain from the Federal Deposit Insurance Commission (www.fdic.gov). For non-bank lenders, you can get the same kind of information from the Federal Trade Commission at www.ftc.gov.
The fresh start you may have gained in filing bankruptcy can be exactly what you need to get your financial life back on track and establish strong credit.
Don't let unscrupulous lenders or over-eagerness push you to act against your better judgment.
Make sure that you have complete and accurate information before you make any choices.
The above summary is not all-inclusive and is not legal advice and is not a substitute for the legal advice of an attorney in your state.