Using Credit Wisely After Bankruptcy
Beware of Credit Offers ‘‘Disguised’’ as Reaffirmation Agreements
Always carefully read any offer of credit, especially from a company that claims to represent a lender listed in your bankruptcy. A debt collection company may be trying to trick you into reaffirming a debt. Check the fine print for language that offers new credit with the condition that some or all of the discharged debt is added to the new account.
‘‘Secured’’ Credit Card
Often marketed as a good way to re-establish credit, ‘‘secured’’ credit cards are secured by a bank deposit. Your credit limit is set by the amount you have on deposit. If you default, you lose the money in the account. They might be useful to re-establish a good repayment history. Unsecured credit card offers are plentiful even after previous financial problems, eliminating the need to allow a creditor to use your bank deposits as collateral. Just be prepared to pay higher interest rates for the new cards.
Credit Repair Companies
No company can guarantee erasing your bad credit. Credit Repair Companies are often an outright scam. If bad credit on your credit report is accurate, only time will remove it. However, if there is old or inaccurate information on your credit report, you can correct it yourself for free by writing a letter to the credit reporting agency challenging the information you feel is incorrect.
Avoid High Cost Predatory Lenders
Bankruptcy does not mean you will have to get credit on the worst terms. If you can’t get credit on decent terms right after bankruptcy, simply wait until you can. After a few years of good credit history, most lenders will not hold the bankruptcy against you.
Auto dealers, mortgage brokers and lenders might be predatory lenders if they advertise: ‘‘Bankruptcy? Bad Credit? No Problem!’’ They tack on extra costs and fees to the loans, which can make it impossible for you to keep up the payments. This type of loan can set you up for failure.
Predatory Mortgage Loans
Avoid offers from home improvement contractors, loan brokers and mortgage lenders for a home equity loan despite your credit history. They are often very costly and can lead to serious financial problems or the loss of your home.
Practices of a predatory mortgage lender might:
- Charge excessive interest rates, ‘‘points,’’ brokers’ fees and other closing costs;
- Require you to refinance your current mortgage to pay off other debts;
- Add on unnecessary and costly products, like credit insurance;
- Make false claims of low monthly payments based on a ‘‘teaser’’ variable interest rate;
- Include a ‘‘balloon’’ payment as the last payment on the loan;
- Charge a prepayment penalty for early payoff;
- Change the terms at closing;
- Make false promises to reduce your rate if you make timely payments within a specified time frame;
- Pressure you to keep refinancing the loan once you get it.
Small Loans
Building up your savings is a prudent approach to life’s financial rough spots, however the need might arise when you need to take out a small loan. Avoid the following high cost loans:
Payday loans — Check cashers offer to take a personal check from you and hold off cashing it for 1-2 weeks in exchange for an amount of cash that is less than your check. The difference between the amount of your check and the cash you get back in return is interest that the lender is charging you and is very costly. If you can’t cover the check, the lender will either try to get you to write another check in a larger amount or sue you.
Auto title loans — Title lenders require you to sign over your car’s title as collateral in exchange for a high interest loan. Falling behind on payments gives the lender the right to repossess your car and sell it. This predatory practice preys on low income consumers and is currently being banned in some states.
Rent-to-own — When you rent-to-own you pay three or four times more than what it would cost to buy. The item you are buying may not even be new. If you miss a payment, the company has the right to repossess the item resulting in the loss of your payments and the item.
Tax refund anticipation loans — These short term, high interest loans are provided to individuals from tax preparation companies for expected tax refunds. If you file early you can expect your refund in a short period avoiding these high cost loans.
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