Using Credit Wisely After
Bankruptcy
Beware of
Credit Offers Aimed at Recent Bankruptcy Filers
“Disguised” Reaffirmation Agreement
Carefully read any credit card or other credit
offer from a company that claims to represent a lender you listed in
your bankruptcy or own a debt you discharged.
This may be from a debt collection company that is trying to
trick you into reaffirming a debt.
The fine print of the credit offer or agreement will likely
say that you will get new credit, but only if some or all of the
balance from the discharged debt is added to the new account.
“Secured” Credit Card
Another type of credit marketed to recent
bankruptcy filers as a good way to reestablish credit involves
“secured” credit cards.
These are cards where the balances are secured by a bank deposit.
The card allows you a credit limit up to the amount you have
on deposit in a particular bank account.
If you can’t make the payments, you lose the money in the
account.
They may be
useful to establish that you can make regular monthly payments on a
credit card after you have had trouble in the past.
But since almost everyone now gets unsecured credit card
offers even after previous financial problems, there is less reason
to consider allowing a creditor to use your bank deposits as
collateral.
It is
preferable not to tie up your bank account.
Credit Repair Companies
Beware of companies that claim:
“We can erase bad credit.”
These companies rarely offer valuable services for what they
charge, and are often an outright scam.
The truth is that no one can erase bad credit information
from your report if it is accurate.
And if there is old or inaccurate information on your credit
report, you can correct it yourself for free.
Avoid High Cost Predatory Lenders
Don’t assume that because you filed bankruptcy
you will have to get credit on the worst terms.
If you can’t get credit on decent terms right after
bankruptcy, it may be better to wait.
Most lenders will not hold the bankruptcy against you if
after a few years you can show that you have avoided problems and
can manage your debts.
Be wary of auto dealers, mortgage brokers and
lenders who advertise: “Bankruptcy? Bad Credit? No Credit? No
Problem!”
They may give
you a loan after bankruptcy, but at a very high cost.
The extra costs and fees on these loans can make it
impossible for you to keep up the loan payments.
Getting this kind of loan can ruin your chances to rebuild
your credit.
Mortgage Loans
If you own your home, some home improvement
contractors, loan brokers and mortgage lenders may offer to give you
a home equity loan despite your credit history.
These loans can be very costly and can lead to serious
financial problems and even the loss of your home.
Avoid mortgage lenders that:
·
Charge excessive interest rates,
“points,” brokers’ fees and other closing costs;
·
Require that you refinance your
current lower interest mortgage or 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 term that
requires you to pay all or most of the loan amount in a lump sum as
the last payment;
·
Charge a prepayment penalty if you
pay off the loan early;
·
Change the terms at closing;
·
Make false promises that the rate
will be reduced later if you make timely payments;
·
Pressure you to keep refinancing the
loan for no good reason once you get it.
Small
Loans
It is always best to save some money to cover unexpected
expenses so you can avoid borrowing.
But if you are in need of a small loan, avoid the following
high cost loans:
·
Payday loans
Some “check cashers” and finance companies offer to take a
personal check from you and hold it without cashing it for one or
two weeks.
In return,
they will give you an amount of cash that is less than the amount of
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.
These payday loans are very costly.
For example, if you write a $256 check and the lender gives
you $200 back as a loan for two weeks, the $56 you pay equals a
728-percent interest rate!
And if you don’t have the money to cover the check, the
lender will either sue you or try to get you to write another check
in a larger amount.
If
you choose to write another check, the lender gets more money from
you and you get further into debt.
·
Auto title loans
For many years, pawn shops have made small high-interest
loans in exchange for property.
A new type of “pawn” is being made by title lenders who will
give you a small loan at very high-interest rates (from 200 percent
to 800 percent) if you let them hold your car title as collateral
for the loan.
If you
fall behind on the payments, the lender can repossess your car and
sell it.
·
Rent-to-own
By renting a TV, furniture or appliance from a rent-to-own
company, you will often pay three or four times more than what it
would cost to buy.
The
company may make even more profit on you because the item you are
buying may be previously used and returned.
And if you miss a payment, the company may repossess the item
leaving with you no credit for the payments you made.
·
Tax refund anticipation loans
Some tax return preparers offer to provide an “instant” tax
refund by arranging for loans based on the expected refund.
The loan is for a very short period of time between when the
return is filed and when you would expect to get your refund.
Like other short-term loans, the fees may seem small but
amount to an annual interest rate of 200 percent or more.
It is best to patient and wait for the refund.
What You
Can Do to Avoid Problems
If you don’t want it, don’t
get it.
If you
have doubts about whether you really need the loan or service, or
whether you can afford it, don’t let yourself get talked into it by
a salesperson using high-pressure tactics.
You can always walk away from a bad deal, even at the last
minute.
Shop around.
You may qualify for a loan with normal rates from a reputable
bank or credit union.
Don’t forget that high-cost lenders are counting on your belief that
you cannot get credit on better terms elsewhere.
Do not let feelings of embarrassment about your past problems
stop you from shopping around for the best credit terms.
Compare credit terms.
Do not consider just the monthly payment.
Compare the interest rate by looking at the “annual
percentage rate,” as this takes into account other fees and finance
charges added on the loan.
Make sure you know exactly what fees are being charged for
credit and why.
Read before you sign.
If you have questions, get help from a qualified professional
to review the paperwork.
A lender that will not let you get outside help should not be
trusted.
If you give a lender a
mortgage in a refinancing deal, remember your cancellation rights.
In home mortgage refinancings, federal law gives you a right
to cancel for three days after you sign the papers.
Exercise these rights if you feel you signed loan papers and
got a bad deal.
Don’t
let the lender talk you out of canceling.
Get help early.
If you begin to have financial problems, or you are thinking
of consolidating unmanageable debts, get help first from a local
non-profit housing or debt counseling agency.
Ten
Things to Think About Before Getting a New Credit Card
1.
Don’t apply for a credit card until you are ready.
Unfortunately, bankruptcy may not have permanently resolved
all of your financial problems.
It is a bad idea to apply for new credit before you can
afford it.
2.
Avoid accepting too many offers.
There is rarely a good reason to have more than one or two
credit cards.
Having
too much credit can lead to bad decisions and unmanageable debts,
and it will lower your credit rating.
This can make it harder for you to get other lower interest
rate loans.
Avoid
accepting a credit card just to get a discount at a store or a
“free” gift.
3.
Remember that lenders are looking for people who run up big
balances, because those consumers pay the most interest.
You may find that credit card companies are pursuing you
aggressively by mail and phone even though you filed bankruptcy.
Do not view this as a sign that you can afford more credit.
The lender may have a marketing profile telling them you are
someone who is likely to carry a big credit card balance and pay a
good deal of interest.
Or they may see you as a good credit risk because you cannot file a
Chapter 7 bankruptcy again for quite a few years.
4.
Interest rate is important in choosing a card but not the only
consideration.
You should always try to get a card with an interest rate as
low as possible.
But it
is rarely a good idea to take a new card just because of a low rate.
The rate only matters if you carry a balance from month to
month.
Also, the rate
can easily change, with or without a reason.
Remember that even the best credit cards are expensive unless
you pay your balance in full every month.
And other credit terms can add to your cost, like annual
fees, late charges, over-the-limit fees, account set-up fees, cash
advance fees, and the method of calculating balances.
Sometimes a credit card that appears cheaper is actually more
expensive.
5.
Beware of temporary “teaser” rates.
A teaser rate is an artificially low initial rate that
applies only for a limited time.
Most teaser rates are good only for six months or less.
After that, the rate automatically goes up.
Remember that, if you build up a balance under the teaser
rate, the much higher permanent rate will apply when you repay the
bill.
This means that
the permanent long-term rate on the card is much more important than
the temporary rate.
6.
If your rate is variable, understand how it may change.
Variable interest rates can be very confusing.
Some variable rate terms can make your rate go up steeply
over time.
Read the
credit contract to understand how and when your rate may change.
And don’t be misled by advertisements that claim “fixed
rate,” as this may mean the rate is fixed only until the lender
decides to change it again.
7.
Check terms related to late payment charges and penalty rates of
interest.
Most credit card contracts have terms in the small print for
late charges or penalty interest rates that increase if you make
even a single late payment.
Try to avoid cards with late fees as high as $25–$35 or
penalty interest rates of 21–24 percent or higher.
Even if you are not having financial problems, these terms
may become important, because they apply equally to accidental late
payments.
8.
Get a card with a grace period and learn the billing method.
It is important to understand how you will be billed.
Look for a card with a grace period that lets you pay off the
balance each month without interest.
If the card does not have a grace period and interest will
apply from the date of your purchase, a low interest rate may
actually be higher than it looks.
The terms of the grace period are also important, as it may
not apply to balance transfers and cash advances.
And look out for different interest rates that may apply
depending upon the type of charge: these usually include a higher
rate for cash advances.
9.
Don’t accept a card just because you qualify for a high credit
limit.
It is easy to assume that because a card offer includes a
high credit limit, this means the lender thinks you can afford more
credit.
In fact, the
opposite may be true.
Lenders often give high credit limits to consumers hoping that they
think will carry a bigger balance and pay more interest.
You must evaluate whether you can afford more credit based on
your individual circumstances.
10.
Always read both the disclosures and the credit contract.
You will find disclosures about the terms of a credit card
offer, usually in small print on the reverse or at the bottom of the
offer.
Review these
carefully.
However, the
law does not require that all relevant information be disclosed.
For this reason, you must also read your credit contract,
which comes with the card.
This will include terms such as late payment fees, default
rates of interest, and a description of the billing method.
Since these terms are not easy to understand, you may want to
call the lender for an explanation.
Or better yet, refuse credit with too many complex
provisions, because those terms are likely to work to your
disadvantage.
Ten
Things to Think About Before Using Your Credit Card
1.
Establish a realistic budget.
Before using a credit card after bankruptcy, try paying cash
for a while.
This will
help you learn how much money you need each month to pay the basic
necessities.
Don’t
forget to budget for the payments on any debts you reaffirmed in
your bankruptcy.
2.
It is important not to use credit cards to make up for a budget
shortfall.
Credit card debt is expensive.
Sometimes credit cards are so easy to use that people forget
they are loans.
Be sure
to charge only things you really need and plan to pay the balance
off in full each month.
If you find you are constantly using your card without being able to
pay the bill in full each month, you need to consider that you are
using cards to finance an unaffordable lifestyle.
3.
If you get into financial trouble, do not make it worse by using
credit cards to make ends meet.
If you find that you are using credit cards to get through a
period of financial difficulty, it is likely that additional credit
will only make things worse.
For example, if you use cash advances on your credit card to
pay bills, the interest due will only add to your debt burden sooner
rather than later.
4.
Don’t get hooked on minimum payments.
Credit card lenders usually offer an optional “minimum
payment” in their monthly billing.
These are usually set very low (usually 2 percent of the
balance), barely covering the monthly interest charge.
If you pay only the minimum, chances are that you will be
paying your debt very slowly or not at all, and you may think you
are managing the debt when you are really getting in over your head.
For example, if you make only the monthly minimum payments to
pay off a $1000 balance at a 17 percent interest rate, it will take
over 7 years to pay your debt!
If you are also making new purchases every month while making
minimum payments, your debt will grow and take even longer to pay
off.
This means that
your monthly interest obligations will increase and you will have
less money in the monthly budget for necessities.
5.
Don’t run up the balance based on a temporary “teaser” interest
rate.
Money borrowed during a temporary rate period of 6 percent is
likely to be paid back at a much higher permanent rate of 15 percent
or more.
Also be
careful about juggling cards to take advantage of teaser rates and
balance transfer options.
It takes a great deal of time and effort to take advantage of
terms designed to be temporary.
Remember that all teaser rate offers are designed to get you
locked into the higher rate for the long term, because that is how
the lender makes the most money.
6.
Avoid the special services and programs credit card lenders offer to
bill to your card.
You are likely to get many mail offers and telemarketer calls
from your credit card lender about special services such as credit
card fraud protection plans, credit report protection, travel clubs,
life and unemployment insurance, and other similar offers.
These products are generally overpriced.
It is best to throw out and refuse these offers, or at a
minimum, treat them with a high degree of caution.
And avoid “free trial” offers as you will be billed
automatically if you forget to cancel the service.
7.
If you can afford to do so, always make your credit card payments on
time.
Be careful to avoid late payment charges and penalty rates if
you can do so while still paying higher priority debts.
Bad problems get worse fast when you have a new higher
interest rate and late charge to pay during a time of financial
difficulty.
Most
lenders will waive a late charge or default interest rate one time
only.
It is worth
calling to ask for a waiver if you make a late payment accidentally
or with a good excuse.
8.
Know exactly when the grace period ends.
The grace period usually ends on the payment “due date,”
which may change every month.
Many lenders do not mail bills until late in the grace
period, so your payment may be due quite soon after you receive the
bill.
This also means
that the grace period may be less than a full month, usually about
20-25 days.
Some
lenders are slow in posting payments or have strange rules about
deadlines (like payments received after
9.
Beware of unsolicited increases by a credit card lender to your
credit card limit.
Some lenders increase your credit limit even when you have
not asked for more credit.
Avoid using the full credit line as your debt can easily
spiral out of control.
And going over the credit limit even by a few dollars can be very
costly as you will likely be charged an over-the-limit fee and a
higher penalty interest rate.
10.
If you do take a credit card and discover terms you do not like:
cancel!
You can always cancel any credit card at any time.
Although you will be responsible for any balance due at the
time of cancellation, you should not keep using a card after you
discover that its terms are unfavorable.
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