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Credit Rebuilding Information
I have been a bankruptcy attorney for 30 years. I have gotten thousands of people out of debt.
I decided that I needed to do more. So I did my research and put together information that
I think will help you rebuild credit after bankruptcy.
If you have not filed a bankruptcy, this may not be good information for you.
I am not a credit repair organization. Those companies charge for their services.
This information is provided to you free of charge as a thank you for allowing me to represent you.
Understanding Credit
As with anything in life, its difficult to repair things if you do not understand how it works. Your credit score is made of several different sources. Below is a graph that represents the items that determine your score.
Whether you've paid past credit accounts on time.
Amount you currently owe
How long you have had credit and new account openings
Frequency of credit inquiries
The mix of your credit, retail accounts, installments loans, finance company accounts and mortgage loans
The purpose of showing you the graph is to emphasize the importance of addressing the rebuilding process as a whole. Addressing one part of the pie graph without addressing the whole pie, is not a good strategy. Let's break them down.
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AMOUNTS OWED
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It is important to open new credit lines after a bankruptcy. The easiest credit to get are credit cards (revolving credit). Unfortunately, credit cards are a necessary evil when rebuilding credit. The proper use of those credit cards can help you rebuild credit.
The optimal balance to have on a credit card is less than 30% of your maximum credit amount. To keep the math easy, if your credit card limit is $300, you never want your balance to be more than $30. This is true for every card that you own.
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More credit cards does not mean that it will help your credit more. The optimal number of credit cards to have when rebuilding is 3. I usually recommend that you use the cards for small purchases such as gas. We will discuss which credit cards you should get and how to strategically use them in a future lesson.
PAYMENT HISTORY
This one is obvious. If you missed payments in your past, it affects your credit. Its a knock on your credit. There is nothing you can do about past missed payments but there is something you can do moving forward. You have to surround the past payments with on-time payments moving forward. The more on-time payments you have, the more likely your credit will improve.
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FREQUENCY OF CREDIT INQUIRIES
When you apply for credit, the lender will usually pull a credit report. There are two types of pulls. One is known as a hard pull and one as a soft pull. A hard credit check is done when you apply for a line of credit such as a car loan or an installment loan. The creditor wants to see your track record prior to deciding if they want to give you a loan.
A soft pull is when you pull your own credit or a lender wants to pre-qualify you for a loan offer.
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A hard credit pull will appear on your credit report and have consequences on your credit. A hard pull will remain on your credit report for up to 2 years and will affect your credit for several months. Too many hard pulls may indicate to a credidtor that you are seeking too much credit and may not be able to pay it back. It is important that you limit the number of hard credit pulls that you authorize.
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A good example is when you are car shopping. If you authorize credit reports being ran at each dealership, your credit score could drop. Prior to authorizing anyone to pull your credit, you should find out if the credit report will be a hard or soft pull.
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LENGTH OF CREDIT HISTORY
This one is self-evident, the longer that you have had credit, the longer your track record will be. Obviously, your lender will get a better picture of your financial stability if you have a long credit history. That is why I often times recommend keeping credit cards open even if you don't use them. As opposed to closing your credit cards which will stop the reporting of that credit card. Your goal is have a long, good credit history.
TYPES OF CREDIT
We have already talked about revolving credit, i.e. credit cards. Credit cards are important, but their are other types that are equally important. You will need a reporting installment loan. Examples of installment loans are car loans, mortgages and personal loans from banks. These differ from revolving loans because you borrow the money up front and then have a definitive amount you have to pay back over time.
It may be difficult to get installment loans after bankruptcy but you can get them. In a later article, we will discuss how you can get installment loans.
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Now you know what makes it up your credit score, let's get started rebuilding. In the pages to follow, I will share with you information to systematically improve credit. You must be disciplined and committed to improving your credit for the advice to work. You can do this. Your financial stability depends on it.