When I began my recovery from bankruptcy, I went through a short period when I thought that I would never be approved for credit again. I quickly found out that this kind of thinking will stall your recovery. Not only should you apply for new credit, if you do things the right way, you WILL be approved. Think about it. You can’t avoid credit forever, and if you want to make big purchases like a house or a car using credit, you have to show lenders that you have been able to be responsible since your bankruptcy. Avoidance is not recovery. Below is a list of the types of credit to apply for, in order, and a basic out – line of how to get approved for each: Secured Credit Cards You want to start with a few major secured credit cards (e.g., Visa ® , Master – Card ® ).
Secured cards are credit cards that are “secured” with a deposit that the lender holds in either a savings account or a CD. Your credit line will be the same amount as your deposit. This helps protect the lender in case you default, but more importantly, it gives you an opportunity to start saving. Having some type of savings account is important when you want to apply for bigger things, like a mortgage. There are a lot of companies offering secured cards out there, so you must be careful. Many of these lenders offer terrible terms with hidden fees and outrageous interest rates. According to my research the two best secured cards on the market are issued by National City Bank ® and Family Merchants Bank.
For more information about these credit card issuers, you can read the special insert: The Top Two Secured Credit Card Companies We Recommend. Start with secured cards. Pay on time for 24 months. Then apply for unsecured cards once your FICO ® scores reach 700.
Retail Cards (Store and Gas Cards) After you have established yourself with a couple secured cards, you should attempt to open one or two retail credit cards (also commonly known as store or gas cards). This can help you in a couple different ways. Having one or two store cards is just more evidence to other lenders that you are responsible enough to handle multiple credit accounts. But more importantly, when these types of cards report to the credit reporting agencies they can also help your credit scores (as long as you don’t max them out), because the FICO ® scoring model likes to see a healthy mix of different types of credit. Unfortunately, getting a store or gas card is not as simple as going up to any cashier and having the store manager review your application. Most retail cards are issued by one of four companies (Citibank ® , GE ® Money Bank, HSBC ™ , and WFNNB). For the most part, these large companies are unfriendly toward bankrupt applicants.
However there are a few retail cards that are easier to get if you have filed bankruptcy. According to our research, the Target ® store card and Marathon gas card offer the best programs for people with a bankruptcy on their credit reports. To learn more about retail cards, see the special insert: How to Get a Retail or Gas Card After Bankruptcy . Auto Loans Depending on your situation, you may need a car loan first. If you’ve had a bankruptcy, your best option is to work with a captive lender. These are lenders who finance just one manufacturer’s cars (e.g., Toyota Motor Credit, Honda Financial Services).
If you want to read more about the different types of lenders you can use to buy a car, refer to the special insert: How to Decide What Type of Lender to Use When Buying a Car
In addition, before you apply for an auto loan, interview any prospective lenders using your highest FICO ® Auto Industry Option SM score to determine which car dealer to work with. To learn more about how to use this strategy to get the upper hand on any car dealer, you can go to: www.autocreditscores.com . Mortgages In many cases, a mortgage is easier to get after bankruptcy than a credit card or auto loan. Mortgage lenders look at many different factors on your application, but there are a few key things you should focus on. The first is your middle FICO score. Mortgage lenders review all three of your credit scores, and then throw out your highest score and your lowest score.
They only care about your middle score. Before you start the mortgage process, you’ll need a middle FICO credit score of around 580. A middle FICO score of 600 gives you even better options in your rate, down payment, and fees. And of course, a middle score of 740 is the brass ring. Mortgage lenders will also look at your time after discharge when consid – ering your application. Some lenders will give you a loan one day out of bankruptcy, but with a higher interest rate, down payment, and fees. In most cases, your middle credit score will determine if you can mortgage a home less than two years after your discharge. Once you reach the two-year mark, your options increase dramatically (if you’ve had a foreclosure, you may have to wait an additional year). The next milestone is 48 months. Four years after your discharge you will qualify for conventional financing at the lowest rates and fees (however, there are ways to speed that up as well). The third major item mortgage lenders look for is debt-to-income ratio (DTI). Most lenders like to see a DTI below 50%.
The lower your DTI the better, especially if you have other factors (like a previous bankruptcy) affecting your approval. Ask your mortgage lender how your DTI affects your loan. Finally, mortgage lenders need to see that you’ve established new credit after bankruptcy, and that you’ve had at least 12 months of on-time payments. Typically, you’ll need at least two or three new credit accounts with good payment histories to be approved for a mortgage at the best terms.
Home Equity Loans
Home equity loans should primarily be used to increase the property value of your house, to invest in other property, or to grow an already successful business. The credit standards for home equity loans are often more strict than for a traditional mortgage.
Usually, lenders require 3 years after dis – charge and a middle FICO ® score in the mid-600s. When you’re applying for a home equity loan, it’s important to know what type of loan you are getting. If you are applying for a home equity line of credit instead of a regular home equity loan, you run the risk of lower – ing your credit scores.
If you want to learn the difference between a home equity loan and a home equity line of credit, and learn how to use these loans safely, you can read the special insert: How to Use a HELOC Without Hurting Your Credit Scores
Unsecured Credit Cards Once your FICO scores break 700 and you have at least 2 years from your discharge, you should be ready to apply for unsecured cards with prime lenders. And I’m not talking about the unsecured credit card offers you get in the mail right after your bankruptcy from lenders like Capital One and First Premier Bank. With scores in the 700s, you should be able to be approved by many credit card issuers. There are some larger banks, such as Citibank ® and Chase ™ ,that will not accept you with a bankruptcy on your credit reports, but there are more than enough other banks that will approve you. Good places to start are the local independent banks in your area.
Just make sure you interview your lenders to confirm that you will most likely be approved before you give them any information. Some lenders will still turn you down simply because a bankruptcy remains on your credit reports. Punks. I know this may look intimidating to you at first. But remember, you don’t have to get all of these types of credit at once. Start slow, and before you know it, you’ll have all the credit you need. Establishing these type of accounts combined with a long, on-time payment history will do miracles for your credit reports and credit scores.