How important is my Credit Score?

Back in June, Attorney Trask spoke on a panel to address some of the public’s concerns regarding divorce, short sales, foreclosures and bankruptcies. The other members of the panel included a financial advisor and a mortgage broker. Of particular concern to the attendees was the harm to someone’s credit that could be caused by bankruptcy, foreclosure, or falling behind on payments on any number of consumer debts an individual may have.

The mortgage broker’s point was stark: “you are your credit score”. The observation garnered some mumbling from the crowd, but the point was clear: In the current economy where the cost of living exceeds an individual’s ability to save for a major (and necessary) purchase like housing, the only practical way for “the 99%” to acquire housing is to rent or purchase with a mortgage from a bank. However your ultimate ability to do so often comes down to a three-digit number maintained by any number of credit reporting bureaus.

A credit bureau is a private business that sells information – nothing more. The information that they sell is data reported to them by your creditors for things such as account and payment history, balances, late payments, and available credit. That information is churned through an algorithm to determine your “creditworthiness” and is expressed as a number. Depending on the agency, the scores can vary, but generally, a FICO credit score ranges between 300 and 850; a VantageScore score ranges from 501-990.

Your credit score is essentially a measure of your financial health that banks and other lenders use these scores to measure eligibility for mortgages, credit cards and a wide variety of other consumer loans. Some landlords check them to screen prospective renters, and some companies check credit reports before hiring a new employee. Low scores or problematic credit histories can mean higher interest rates or rejected applications.

Despite the importance that fair and accurate credit history reporting holds on an individual’s ability to obtain housing, employment, or other consumer loans, the various credit reporting agencies were under fairly lax legislative oversight. The Fair Credit Reporting Act required that all information contained in a report be “accurate”, but did little to specify any procedure to ensure accuracy. The FCRA primarily provides a mechanism to disclose the information contained in the report to a consumer – not to redress inaccuracies in the report itself. A consumer is entitled to a free credit report (but not a free credit score) within 60 days of any adverse action (e.g. being denied credit, or receiving substandard credit terms from a lender) taken as a result of their credit score.

However, there seems to be some change on the horizon.

In addition to the Fair Credit Reporting Act, Under the Wall Street Reform Bill passed on July 22, 2010, a consumer is entitled to receive a free credit score if they are denied a loan or insurance due to their credit score. Also, the newly-created U.S. Consumer Financial Protection Bureau (CFFB) has indicated an intention to provide additional federal oversight of credit reports in an effort to ensure accuracy, and will be able to conduct an investigation of the offending reporting agency in the event of a consumer complaint. These changes were discussed in our previous post as well:  Is the Government Monitoring your Credit Report?

5 Contributors to Your Credit Score [Infographic]

Though credit scores play an integral role in our lives, few of us actually know which factors make up the numbers assigned to us and how they are weighted. The following credit score infographic sheds some light on this subject.

Courtesy of: Credit Card Education

Reprinted from: CreditCardEducation.com.

Kelsey & Trask, P.C. provides this graphic for informational purposes only. We do not endorse nor claim endorsement from the source site or organization. Kelsey & Trask, P.C. is not responsible for any information contained therein, unless indicated specifically on that site.

FAQ #22: If I get married after filing for bankruptcy will it affect my spouse?

If you get married after filing bankruptcy, the “taint” of bankruptcy on your credit report will not affect your spouse’s credit. However, a bankruptcy on one spouse’s credit may make it difficult to obtain joint credit accounts, which are often necessary for large purchases, such as cars or home mortgages. This is because the lender will consider the total credit risk of all parties to the note, not just the one with the good credit. While you still may qualify for a loan, a poor credit rating may exclude you from certain FHA loans, and you may be required to pay a higher interest rate over the course of the loan.

FAQ #17: Would I be able to refinance my home after filing?

Yes, and in many cases, you should. If you keep your home during the bankruptcy and do not reaffirm the debt, any later on-time payments will not be reflected on your credit report. This is due to a technical issue regarding the severability of mortgages and the note, and how debts are reported to the credit reporting agencies. However, paying off the existing mortgage and refinancing will have a much greater effect in rebuilding your credit.

Because bankruptcy (and often, the financial difficulties which gave rise to a bankruptcy filing) will make it difficult to obtain credit, many people will find it difficult to refinance immediately after bankruptcy. However, taking steps to repair credit (such as establishing a good repayment history on other reaffirmed debts or a secured credit card, maintaining a cash reserve, paying debts on time, and borrowing and repaying a small personal loan) can accelerate credit repair. If you take the proper steps to rebuild your credit following bankruptcy, you may be able to qualify for a refinance loan in as little as 2 years after your discharge.

FAQ #6: Can I buy a house, car or get credit cards after I file bankruptcy?

Once your bankruptcy case is concluded, there are no restrictions on property that you may own or purchase. Any property that is acquired during the bankruptcy proceeding (the period between filing and the closing of the case) must be disclosed to the bankruptcy court by amending the bankruptcy schedules, but after the discharge these limitations cease.

Similarly, you may incur new debt, however, any debt that is obtained after the date of filing is not included in the discharge. As a general rule, it is advisable to not incur any new debt or acquire any new assets until you receive your discharge from the bankruptcy court.

Once you have your discharge, just because you may borrow money or purchase assets, does not mean it will be easy. Bankruptcy filing makes it difficult to obtain the credit required to purchase these items, for some time. Because bankruptcy (and often, the financial difficulties which gave rise to a bankruptcy filing) will make it difficult to obtain credit, many people will be unable to purchase a new home or car, or obtain a credit card for a period of time after bankruptcy.

Taking steps to repair credit (such as establishing a good repayment history on reaffirmed debts or a secured credit card, maintaining a cash reserve, paying debts on time, and borrowing and repaying a small personal loan) can accelerate credit repair. If you take the proper steps to rebuild your credit following bankruptcy, you may be able to qualify for an unsecured credit card, car loan or mortgage in as little as 2 years after your discharge. Eventually, if you budget correctly and manage your credit after your bankruptcy better than before, you will be able to purchase a new home and/or car.

If you don't see your question and would like more information please do not hesitate to call us at 508.655.5980, e-mail us, or attend one of our weekly Free Debt Relief Clinics.

FAQ #1: How will filing bankruptcy affect my credit?

Over the next few months we are going to post on this site the questions that our clients and potential clients ask.

Bankruptcy can be a confusing and scary process. But it doesn't have to be! At Kelsey & Trask, P.C. we work hard to makes sure our clients understand the process so they can stop the collection calls and move on with their life. If you want to move on with your life too, then take charge and get your questions answered. Check back often to find answers to the 25 most common questions that we receive, presented in no particular order:

FAQ #1: How will filing bankruptcy affect my credit?

Put simply: filing bankruptcy will hurt your credit. According to the credit reporting service freecreditreport.com, your credit score (FICO Score) will decrease between 85 and 105 points if your credit is poor, and between 140 and 160 points if your credit is good or excellent. While this seems significant, for most consumers, this is not significantly worse than a missed credit card payment, which, even if it happens once, can lower your score between 60 and 80 points for poor credit, and 90 to 110 points if your credit is good.

The fact that you filed for bankruptcy will appear as a “public records” entry on your credit report for up to 10 years, and individual debts that were discharged in bankruptcy will remain on your credit report for 7 years after discharge. The discharge date is different depending on the type of bankruptcy you file. In a Chapter 7 case, your discharge is granted approximately 5-6 months after filing; in a Chapter 13 case, your discharge is granted between 3 and 5 years after filing, depending on your plan terms.

However, if you take the proper steps to rebuild your credit following bankruptcy, you may be able to qualify for an unsecured credit card, car loan or mortgage in as little as 2 years after your discharge.

If you don't see your question and would like more information please do not hesitate to call us at 508.655.5980, e-mail us, or attend one of our weekly Free Debt Relief Clinics.

What hurts your Credit Score and should you care?

The Infographic provided below is helpful, at a glance, in understanding the ways that certain negative events can affect your credit score. This information is most useful for those people who already have good scores, because it tells you what to avoid to keep your score high.

But what if your score is already damaged by missed payments and other issues (foreclosure, debt settlement, etc.)? Should you care about your score?

NO

That answer may surprise you, but in our experience people are more concerned with their credit score than with more immediate present issues. Your credit score is important in that it can affect your ability to obtain loans, mortgages, credit cards, and other financing. But if you are already missing payments on your current debt, then this is not the time to worry about future financing. In other words, your credit score isn't as important as the information on your credit report. Fixing the problems on your report will lead to a good score.

So before you can worry about your score in the future, you must first get your house in order. What we tell our potential clients, in our 1-hour consultation, is that they need to set a realistic budget, whether or not they decide to file for bankruptcy. Even when you have significant debt but believe you can work your way out, you will need a realistic budget to make that happen. Until you can manage your current debt, you should not be worried about borrowing more.

Similarly, if you file for bankruptcy, you need to take steps to make sure you don't end up back in a position where you can't pay your debt. As you would expect bankruptcy is one of the worst things that can happen to your credit score. But if you are in a position to go bankrupt, your score has most likely already been significantly affected by your existing debt.

DISCLAIMER: This infographic is provided by freescore.com as an advertisement. We have reproduced it here because it contains useful and interesting information, however we do not endorse or claim any knowledge of freescore.com. We recommend that all of our clients and potential clients obtain their credit report as soon as possible. While you may choose to purchase a credit monitoring service (freescore.com, freecreditreport.com, etc.), you can obtain your credit report, once every 12 months, at annualcreditreport.com without any cost, trial membership or other enrollment. You also have a right to obtain your credit report directly from each of the three credit bureaus by writing to them directly.


[Via: FreeScore.com credit score]

Infographic: All you Need to Know About Credit Scores

click image to enlarge
 

Source:http://www.billshrink.com/blog/11628/all-you-need-to-know-about-credit-scores/

How do I Rebuild my Credit after Bankruptcy?

A common question from our bankruptcy clients after they receive their discharge is: "How do I rebuild my credit?"

First and most importantly, time heals all wounds. Only time can fully repair the damage that bankruptcy (and being significantly behind on a lot of credit card debt beforehand) inflicted.

The best thing you can affirmatively do right now is to start developing a history of on-time payments to creditors that report to your credit bureaus. Pay your bills early, or if anything, pay them on time.

Because of the way the bankruptcy system works and the way creditors report reaffirmed debts, you will not get credit for on-time mortgage payments or car payments. Therefore, it is necessary to establish a new account that you can make solid, on-time payments on. We recommend applying for a secured credit card or gas card. Before you apply, take the time to confirm that the card management company reports to all three credit bureaus every month. If they don’t report every month, or if they do not report to all three, go elsewhere. Use the card, but pay it off on time, every month. Carrying a small balance (less than $100 is OK), but never utilize more than 50% of the available credit.

If you have a mortgage, then as soon as feasibly possible, refinance your mortgage. Paying off the current loan and keeping a new loan current will, once again, give you credit for on-time mortgage payments.

As soon as you feasibly can, refinance your car loan, or sell your car and purchase a new car. Again, the key is to obtain a new loan that will report to the credit bureaus. Post-bankruptcy, many current secured lenders will not report payments to the credit bureaus. Of course, be sure to keep that loan current.

Obtain copies of your credit reports approximately 90 days after receiving your discharge. Ensure every debt is reported as “Discharged in Bankruptcy” or something similar. If they are not, send a letter to the creditor and the credit bureau requesting that information be reflected accurately. Remember, your credit report is a list of your “debts”, and right now, you have no debts aside from your house and car. Make sure your credit reports accurately show that, although you had debts discharged in bankruptcy, you should not currently owe any money to dischargeable creditors.

Besides paying the above-described loans on time there are also a number of things you should avoid doing:

1. Avoid opening credit accounts with co-signers, if possible. Having a co-signer on an account indicates you are a greater credit risk.

2. Avoid financing with finance companies or sub-prime lenders, if possible. Doing business with these companies can actually lower your credit score.

3. Avoid future financial risk. Bulk up your savings account. Develop a budget, and stick to it. That way, when emergencies or unexpected expenses come up, you can pay in cash, rather than increasing your debt.

4. Some industry experts recommend that you obtain a small personal loan, and use the funds to open a CD account. Pay the loan on time, and when the loan is paid off, you will have some funds in savings, which you can take out once the CD matures. Of course, this only works if you can fit these payments into your budget. Setting up a workable budget should be your first priority.

Should damage to my credit keep me from filing bankruptcy?

Assuming your bankruptcy goes to discharge without objection, you will now find yourself with the daunting task of rebuilding your credit, post-bankruptcy. A Bankruptcy appears on your credit report and will negatively impact your credit score. Because bankruptcy negatively impacts your credit, borrowing money may be more difficult, and when possible, may be more expensive.

A bankruptcy filing remains on your credit report for 10 years, and individual debts discharged in bankruptcy for 7 years following your discharge. Therefore, whenever you apply for credit, a new loan, or undergo a background check, a previous bankruptcy will be visible to the loan officer, hiring manager or credit card company.

But what is the alternative?

If you have a significant amount of debt and can't make the payments then your credit is already damaged. If you are making the payments but can only make the minimum payments, then you may be able to save your credit but only if you are able to find a way to pay down your debts.

A good guideline for deciding if you are a potential candidate for bankruptcy is to consider how long it will take you to pay down your debts. If you make a realistic budget of all of your income and expenses and pay all of your excess income towards your debts, how long will it take you to pay them off? If the answer is five or more years, then you may be a good candidate for bankruptcy and should consult with an attorney to find out more about your options.

As long as you cannot pay down your debts you won't be able to borrow or use your credit anyway, so filing bankruptcy may be a better alternative. This is especially true if you are only paying minimum payments and have no realistic chance of paying down your debts in the foreseeable future.

How filing (or not filing) affects your credit is only one factor in making a decision about whether or not to file a bankruptcy and you should consider how your credit might be affected by your debts regardless of whether or not you file a bankruptcy.

What’s With My Credit Score? - Infographic

Reprinted from Free Credit Score – CreditSesame.com