Bankruptcy and Your Credit Score

There’s no way around it: a bankruptcy will unavoidably negatively impact your credit scores. However, there are a number of factors that will affect just how severe the effect is on your score, some of them unexpected. While there is no straightforward formula regarding how many points any one person will lose in a bankruptcy, there are a few factors that can help you make a healthy guess.

A few things to consider:

How High Was Your Score Before?

Ironically, someone with a higher FICO score will see a bigger drop as the result of a bankruptcy than someone with a lower score. In a mock scenario released by FICO in 2010, they compared two hypothetical scenarios: one person with a 780 and one person with a 680, both of whom file for bankruptcy. The person with the higher score lost 240 points while the person with the lower score lost only 150, leaving them both with scores in the mid 500s.

However, bankruptcy usually occurs after a long stretch of failing to pay bills on time, so, it is likely that late payments already negatively affected your score by the time that you file.

How Many Accounts Are Involved?

The more accounts that are included in your bankruptcy, the larger the effect on your credit score. The discharged debts each count as a negative filing. However, these will drop off your credit record seven years after filing, so, your credit rating will start to improve even before the bankruptcy is gone from your credit records.

How Long Ago Was the Bankruptcy?

A Chapter 13 bankruptcy filing stays on your credit record for seven years, while a Chapter 7 bankruptcy stays for 10. The longer it has been since you filed and the more responsible you have been in the interceding time, the less your bankruptcy will depress your credit score.

Rebuilding After Bankruptcy

After a bankruptcy, you can rebuild your credit and achieve goals that include a home purchase. Some methods to use during your credit repair journey to improve your score:

Review your credit reports. Make sure that all debts that were discharged in the bankruptcy are reflected accurately. As many as 79% of all credit reports have at least one error, so, it is worth it to check.
Pay every bill on time. Late payments can snowball and destroy your credit over time. Try automating payments so you never forget one.
Look for a secured credit card. Cautiously add revolving loans so that you can show creditors that you can be trusted with credit.
Use cards sparingly but regularly. Build up a regular habit of responsible use. One good way to do this is to charge a small, regular bill like a gym membership to your card and pay it off in full each month.
Do not close old credit card accounts. If you have any credit card accounts from before your bankruptcy, keep them open. The age of your credit accounts is a factor in your credit score, and the older your accounts, the better.

While a bankruptcy is a challenge, it is not the end of your financial life. Educate yourself about your credit, and carefully rebuild to restore your financial future.

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How to Spot a Fraudulent Credit Repair Service – Education

If you are working toward a home purchase, it’s important to get your credit into the best possible shape. Credit repair companies can help, but, you need to pick one that will do the work that you want. There are, unfortunately, many unscrupulous agencies making promises that make oversized promises or ones that charge far more than they should. Here are some warning signs to look for when looking for a company to help you fix your credit:

They promise they can erase a bankruptcy. No company can erase a legitimate negative issue with your credit. If you encounter a company that promises that they can make a bankruptcy go away, they are not telling you the truth. Only time and responsible credit management can remove a bankruptcy from your credit history.
They say they can eliminate debt. No company can erase a debt that you legitimately owe. It is legal and possible to get erroneous accounts removed and to negotiate settlements. However, there is no magic wand that will simply make legitimate debts disappear.
They promise a new credit identity. If someone promises you a clean, new credit identity, they are breaking the law. When a company promises this, what they give you is a number that looks like a Social Security number. However, it is in reality an Employer Identification Number that has specific legal uses. It cannot be legally substituted for a personal Social Security number, and anyone who says that it can is putting you in danger of breaking the law.
They tell you to lie on credit applications. This is something that can leave you with expensive fines or worse and no honest company would do that. If you encounter a company that encourages you to be dishonest when applying for a home loan, do not do business with them.
They fail to explain your legal rights. When dealing with credit repair agencies, you have a few specific rights under the Credit Repair Organization Act (CROA). For instance, you have the right to cancel the service within three days without being charged. You have the right to know, in detail, what services they are offering. You are entitled to know how long the process will take. Any company that refuses to supply this sort of information is in violation of federal law.
They try to charge you before they’ve done anything to help. The CROA also forbids charging for credit repair before services have been rendered. If a company is looking for money in advance, this is a good sign that their service is a scam.

If you encounter any of the red flags above, walk the other way. These are clear signs of an expensive and ineffective credit repair scam. When it comes time to fix your credit so that you can move forward with home ownership dreams, entrust your financial future to a company that is reliable, trustworthy and has your best interests at heart.

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Automate Your Finances – Never Miss a Bill Again

When you have done all of work necessary for credit repair, it just makes sense to keep your record clean and your score high. This is especially important if you are working toward a home purchase. But, if you have problems remembering to pay bills, this can undo all your effort. Luckily, a few minutes spent automating your finances can help ensure that you never miss a bill and painlessly build your nest egg at the same time.

Start with Direct Deposit

If you still receive a paper check from your job, see if they will switch you to direct deposit. Having your paychecks deposited directly into your account means that you spend less time at the bank, have your money sooner, and even have a wider choice of banks.

Set Up Automatic Bill Pay for All Regular Bills

Many checking accounts will allow you to set you automatic monthly payments using bill pay features in your account. If you do not have this option, you can also check whether the companies you pay each month have automatic deduction features on their web sites.

For credit cards, set up an automatic payment that will cover at least the minimum on your card. You will usually have the option to choose the day of the month that payments go through. This way, you can pick a day that comes after your payday. For instance, if you get paid on the 15th of the month, schedule your car insurance payment to hit a day or so after that each month.

Get Automatic Savings, Too

Many savings accounts and retirement accounts allow automatic contributions. These are taken directly out of your checking account, so, you never miss the cash. A regular automatic contribution to a savings account is a painless way to accrue funds for a down payment on a house. By automatically contributing to retirement accounts like IRAs, you establish future security. Plus, many discount brokerages will reduce or even eliminate fees if you sign up for automatic contributions to the account.

Give Your Finances Periodic Check-Ups

Once all of the money that goes into and comes out of your accounts has been automated, you will need to check balances far less often. However, it is still worth it to look at accounts periodically to see if adjustments need to be made. For instance, once your savings account balance reaches a certain level, you can transfer money to higher yield investments. As a rule of thumb, look at your checking account a few times a month and investment accounts a few times a year.

Do Not Automate If…

There are some situations where automating bill payments and contributions to savings can be counterproductive. Automatic investments may not work for people who have unpredictable income, since billing dates may not work with the days you get paid. You should also avoid automation if your checking account balance tends to be dangerously low.

Each person should evaluate their finances individually. For most people, in the end, worrying about one less aspect of your finances can reduce your stress levels and increase your financial well-being.

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Online Banking – Should I switch?

As bank fees climb ever higher, many people are looking for ways to spend a little less. One option to explore is switching over to an online-only bank. These are banks that save money by having few or no local branches. Instead, customers do all of their banking via a secure website.

These sorts of accounts can have a lot of advantages, including:

Lower fees. Most online accounts offer no-fee checking, so, you keep more of your money in your pocket. If you are in the middle of credit repair, this is money that can be applied toward settling unpaid debts.
Higher interest rates. Very few brick and mortar banks offer interest on checking accounts, while most online banks do. Online banks also typically have higher interest rates on other products like savings accounts and CDs.
Easy-to-open accounts. At most online banks, you can open new CDs or savings accounts with a few clicks of the mouse. This can be a simple way to put aside money if you are saving for a big expense like a home purchase.
Twenty-four hour a day banking. Instead of being limited to your local branch’s banking hours, you can sign on at any time day or night to do anything from opening an account to paying your bills.

A few of the possible drawbacks to consider:

Are you a tipped worker? Servers, delivery drivers, and others who are primarily paid in cash might find online banks inconvenient. Few allow cash deposits at ATMs or through the mail, so, you can get stuck mailing a money order.
It can be slow to deposit a paper check. While more and more online banks are allowing check deposits via mobile phone or home computer, this is not yet universal. If you have a poor credit rating or if the service is not available from your online bank of choice, you may have no choice but to mail checks to make a deposit.
No in-person contact. Sometimes, bank customers feel more comfortable talking in person with a branch manager, such as when working to resolve insufficient fund fees or other issues. If you have an online-only account, all communication will necessarily be via phone or email.

How to find the best online bank for you:

Check out banking review sites like Bankrate.com and MyBankTracker. These sites keep track of factors like interest rates and fees and also post user reviews.
Ask friends about their experiences. They will be able to share stories about their experiences with customer service, ease of setting up accounts and other details.
Check financial companies you already do business with. Discover, for instance, has banking products such as a cash-back checking account in addition to their credit card services.

As with any other banking decision, make a list of your requirements and find the bank that satisfies those needs best. If your lifestyle is compatible with the offerings of an online bank, you just might keep more money in your pocket by making the switch.

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Sinking in debt? – Pros and Cons behind debt management

People call into our office every day with the following questions:

“Nik. Should I file for bankruptcy? Should I look into consumer credit counseling? Should I consolidate my debt? What should I do?????? Aaaarrrgghhhhh”

Well, let’s start by defining each of the options available. There are pros and cons to each scenario and that is why dealing with a neutral company to assess your scenario is always your best bet. Key Credit repair is a “Credit Repair” company. This should not be mistaken-ed for a debt solutions company. When our clients ask us what to do with their debt we are able to assess their options better than a lawyer, debt settlement agent or credit counselor because we do not stand to gain financially from dealing with our clients debt problems. In fact, most of the debt solutions and advise we give is 100% free of charge. Anyway, here are the options…..

#1 Bankruptcy: There are two main types of bankruptcies for consumers. The first of which is a Chapter 7( we’re only talking about this options. I think chapter 13 is almost never an option)

Pros: A chapter 7 bankruptcy allows a consumer to wipe away all of their debt without paying back anyone. Also, in many cases you are able to keep your home, car and personal belongings. It can be an absolute savior in terms of getting out from under the harassing phone calls and possible law suits and wage garnishments from creditors. It’s a nice, quick “clean slate” if done correctly.

Cons: A bankruptcy filing is a 10 year mark on your credit report. bankruptcy doesn’t necessarily clear away all of your debt. Certain federally backed student loans cannot be included.

#2: Debt Consolidation: A consolidation should not be mistaken for a debt settlement or debt relief program. A “True” debt consolidation is taking out new loan and using the proceeds of that loan to pay off your existing debt.

Pros: These loans have provided major savings to consumers in the past. While credit car rates can hover around 30% Apr most installment loans used to consolidate debt are well below 10%. This can create considerable savings. Also, the payments on these loans are usually fully amortized. This means that your payment each month is not just going to interest but to principal as well. This allows you to see your balance drop each and every month.

Cons: These loans are almost completely obsolete. Unless you already have a great credit score (probably not because of your debt load) or belong to a credit union through your employer they are very hard to get (with the exception of student loan debt. Call me:).

#3: Consumer Credit Counseling: Most of the companies that offer consumer credit counseling are non-profit organizations (This doesn’t mean that the CEO’s aren’t making a million bucks and the people you are talking to aren’t commissioned employees. Not for profit is too loosely used these days). With these programs the consumer credit counseling agency will negotiate with each of your creditors for a lower interest rate. For a monthly fee (typically around $40) they will have you make a one time payment per month to them that will be distributed to all of your creditors until you are debt free.

Cons: While you are in a consumer credit counseling program you will not be able to use your cards. This is probably a good thing but for many consumers this can be a pretty big turn off. Also, each of the creditors that have been placed in a counseling program will place a mark on your credit report indicating that your debt is being managed by a third-party. Although this comment is credit score neutral most banks and lenders will not lend to you while in one of these program.

#4: Debt Settlement/Relief program: A debt settlement is a great bankruptcy alternative. In one of these programs a consultant will usually work with you to find out how much money you can budget each month into a dedicated savings account to be used to pay off your creditors. As you accumulate money in your savings account the debt settlement company will use those funds to pay off your debt at a reduced balance. This is a great tool to get out of debt at a pretty large discount. Many of the collection agencies that are purchasing the debts from your credit card companies are willing to settle for 20-50 cents on the dollar. Also, the Federal Trade Commission does not allow debt settlement companies to make fees until they have negotiated your settlement so that guarantees that you will not be charged anything up front.

Cons: Many time companies will not make it clear that they will not be making payments to your creditors until you have accumulated enough savings for a settlement. Also, if your debts are currently up to date you will end up seeing a significant credit score drop. These programs are designed primarily as a bankruptcy alternative.

#5: Do nothing: Yes, I’ve said it. “DO NOTHING”.
Pros: As time passes you will get closer and closer to your states statute of limitations for the collection of a debt. For example, here in Massachusetts you can refuse to pay on a debt 6 years after the date of last activity. Some states have statutes as low as 2 years. This is all pending that they haven’t sued you because judgement can be held over your head for 10 years.

Cons: Hhhhmmmm. Karma? Also, your credit report will still carry these debts for 7 years. Your refusal to pay does not necessarily remove the negative record because of their in ability to collect the debt from you.

Feel free to reach out to myself or any of my team members with your questions about how to approach debt.. Also, please forward this to anyone that needs a “real” take on how to deal with debt.

Tag: politics