When & Where CREDIT. to Apply for. How to Know. Discover when your credit is good enough to get approved FIX YOUR CREDIT YOURSELF HOW TO

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1 HOW TO FIX YOUR CREDIT YOURSELF (without an attorney) How to Know When & Where to Apply for CREDIT Discover when your credit is good enough to get approved

2 Introduction Now that you ve been through the process of learning how to fix your credit scores you may feel that your scores are high enough to begin applying for the credit you want or need. Maybe you feel that you ve met the specific credit goal you set to reach at the beginning of the program...maybe your credit scores have improved, or time has gone by since your bankruptcy and now you re ready to test the waters by applying for credit. But are you ready? Will you be turned down? How do you know if you will get approved? And if you did have the confidence to proceed, what would be the best type of lender to apply with? That s the purpose of this Lesson. It is designed to take you by the hand and give you confidence to know when you are ready to apply for credit. Mystery solved... When To Apply Charts Applying for credit after bankruptcy can be a confusing and intimidating process. In this section we ll focus on timing. When you apply for credit depends on several factors. One of the most important is how long it s been since you were discharged from your bankruptcy (we will discuss the others in detail later in the report). A discharge normally occurs between 90 to 120 days after your bankruptcy is filed if you filed Chapter 7. If you filed Chapter 13, a discharge can take 3 to 5 years. 2

3 On the next few pages are charts that clearly point out when it s appropriate to apply for credit after bankruptcy. I ve never published charts like this before for good reason. Who am I to tell someone that it can t be done? But having been asked so many questions relating to this issue over the years (e.g., Can I get approved for a personal loan if I just filed bankruptcy last week? ), I decided it was time. The charts are broken down into several categories: One day after discharge 6 months after discharge 1 year after discharge 2 years after discharge 3 years after discharge 4 years after discharge 5 years after discharge 6 years after discharge 7 years after discharge Chapter 13 filer Chapter 13 discharged After the bankruptcy is removed from credit report(s) 3

4 Before you dive into the charts, let s define a few of the items below that may not be obvious. (I think most people know the difference between a new and used car.) Low limit unsecured cards - These are what I consider to be predatory lenders. They typically solicit you after your bankruptcy and offer up to a $500 line of credit at a very high interest rate (one even goes as high as 59%!). Unsecured credit card - This is the normal type of bank credit card people with excellent credit get, usually with a high limit and low interest rate. Secured credit cards - These are types of cards that require you to deposit money with a credit card lender, and they give you a limit of credit based on the amount of your deposit. FHA mortgage - This is a government mortgage program provided by the Federal Housing Administration. Conventional mortgage - This is what traditional banks offer their customers. Conventional mortgages have more strict rules for people with a previous bankruptcy. The charts are found on the next twelve pages. Turn the page to start with one day after bankruptcy discharge. 4

5 When to Apply: One Day After Bankruptcy Discharge Type of Loan or When Pigs Fly Maybe Don t Bother Buyer Beware Why Are You Waiting? New Car Used Car Low Limit Unsecured Normal Unsecured Secured Retail FHA Mortgage Conventional Mortgage Mortgage Refi Personal Loan Business Loan Finance Company Loan 5

6 When to Apply: 6 Months After Bankruptcy Discharge Type of Loan or When Pigs Fly Maybe Don t Bother Buyer Beware Why Are You Waiting? New Car Used Car Low Limit Unsecured Normal Unsecured Secured Retail FHA Mortgage Conventional Mortgage Mortgage Refi Personal Loan Business Loan Finance Company Loan 6

7 When to Apply: 1 Year After Bankruptcy Discharge Type of Loan or When Pigs Fly Maybe Don t Bother Buyer Beware Why Are You Waiting? New Car Used Car Low Limit Unsecured Normal Unsecured Secured Retail FHA Mortgage Conventional Mortgage Mortgage Refi Personal Loan Business Loan Finance Company Loan 7

8 When to Apply: 2 Years After Bankruptcy Discharge Type of Loan or When Pigs Fly Maybe Don t Bother Buyer Beware Why Are You Waiting? New Car Used Car Low Limit Unsecured Normal Unsecured Secured Retail FHA Mortgage Conventional Mortgage Mortgage Refi Personal Loan Business Loan Finance Company Loan 8

14 When to Apply: Chapter 13 Filer Type of Loan or When Pigs Fly Maybe Don t Bother Buyer Beware Why Are You Waiting? New Car Used Car Low Limit Unsecured Normal Unsecured Secured Retail FHA Mortgage Conventional Mortgage Mortgage Refi Personal Loan Business Loan Finance Company Loan 14

15 When to Apply: Chapter 13 Discharged Type of Loan or When Pigs Fly Maybe Don t Bother Buyer Beware Why Are You Waiting? New Car Used Car Low Limit Unsecured Normal Unsecured Secured Retail FHA Mortgage Conventional Mortgage Mortgage Refi Personal Loan Business Loan Finance Company Loan 15

16 When to Apply: No Bankruptcy on Your Reports Type of Loan or When Pigs Fly Maybe Don t Bother Buyer Beware Why Are You Waiting? New Car Used Car Low Limit Unsecured Normal Unsecured Secured Retail FHA Mortgage Conventional Mortgage Mortgage Refi Personal Loan Business Loan Finance Company Loan 16

17 The Right Way to Apply for Credit After Bankruptcy 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 would delay my recovery. The same is true for you. Most lenders need to see that you can be trusted with credit before they will consider you. 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. So how do you know where to start? Should you take the first low limit credit card offer you receive in the mail? (Hint: NO!) On the next few pages, I ll detail the types of credit to apply for, in order, and a basic outline of how to get approved for each. Secured s 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 usually be the same amount as your deposit. You don t have access to the money while the card is secured, but you do have a line of credit. The goal is to pay off the balance every month just like any other normal credit card. 17

18 You want to have two to four major secured credit cards (e.g., Visa, Master- Card). I recommend starting with one or two secured cards. Begin with the highest limit possible. Most legitimate secured card issuers will allow you to deposit a maximum credit limit from $5,000 to $10,000. Try to get as close to the maximum credit limit with your initial deposit as possible increasing the credit limit as high as allowed as soon as you can (this is important) then get another, and another until you have up to four major bank cards. Pay on time for 24 months. Then ask your secured card lenders to graduate your cards to unsecured cards. Graduation means the lender will review your account history and decide if they will give you your deposit back and graduate you to a new unsecured bankcard. The best secured credit cards for recovery from a bankruptcy don t rely heavily on your FICO credit scores. However, the higher your credit scores, the more options you will have to get approved for multiple cards at the best rates and terms. Car and mortgage loans are necessary to establish a good mix of credit but major bank credit cards carry more weight with FICO than other types of credit. Whatever is holding you back from getting 2 or 4 secured bank credit cards, build a bridge and get over it. It s just that important. Retail Cards (Store and Gas Cards) After you have established yourself with a couple secured cards over 6 months, you should attempt to open one or two retail credit cards (also commonly known as store or gas cards). 18

19 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 or having the store manager review your application. Most retail cards are issued by one of three companies (GE Money Bank, Capital One, 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. TIP: 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. Auto Loans Many people with low credit scores think that they have only one option when trying to buy or lease a car. But, this is not always the case. You don t have to settle for a 28% loan from AmeriCredit. You can do better you just have to know the right sources to go to (and the right questions to ask when you get to them). If you need a car loan after bankruptcy, your best option is to work with a 19

20 captive lender. (e.g., Ford Motor Credit). Captive lenders (also called manufacturer lenders) are, basically, lenders who finance just one manufacturer s cars. For example, Ford Motor Credit finances Ford vehicles. GMAC (now called Ally Bank) finances General Motors vehicles. You get the idea. Below are the three types of lenders you can use to finance a car, with a detailed description of how each works. Captive Lenders/Manufacturer Lenders Captive lenders (also called manufacturer lenders) are, basically, lenders who finance just one manufacturer s cars. For example, Ford Motor Credit finances Ford vehicles...you get the idea. So, when dealing with captive/manufacturer lenders, keep in mind Captive lenders have special incentives (low rates and rebates) on almost all new cars. They also have certified, pre-owned programs for used cars. 2. Find a dealer that sends the majority of their finance deals to their captive lender. That dealer will have more buying power than other dealers. Even though most new car dealers use the captive lender as their primary lending source, there are exceptions. The exceptions are easy to find out. Just ask the finance manager at the dealership, Who does most of your finance deals? 20

21 If the dealer says, Ford finances most of our deals, you re going to want to get your car financed through Ford Motor Credit. It s obvious that the dealership has a good relationship with Ford, and that leads to better deals for you. Banks and Credit Unions I m sure you re familiar with the concept of getting loans through banks and credit unions. For the purpose of car loans, both essentially function the same. So here s what to keep in mind Be sure the bank or credit union reports to all three national credit reporting agencies. 2. If your FICO credit scores are high enough, the majority of the time it is better to go through banks and credit unions if you re buying a new car with rebates. Often, with a captive lender, you ll either get a rebate or a low interest rate but not necessarily both. However, with a bank or credit union, you can take advantage of the rebate the manufacturer is offering and get a lower interest rate than what the manufacturer s captive lender offers. Again, this only works if you have high credit scores. 3. If you re going to get financed through a credit union, the dealer will offer to sign you up as a member for the credit union on the spot (99% of the time). Usually, that means you ll qualify for an additional.25% to.75% rate reduction. It s really easy for the 21

22 finance director to forget to mention that reduction to you so make sure you ask for it. Be firm and hold your ground you deserve that reduction, so make sure they give it to you. 4. If you finance a car loan through a bank or credit union, you re establishing a lending relationship. Pay back your loan as agreed, and you ll have a good history with the bank or credit union so you ll be able to use them for other types of loans, such as personal loans, business loans, or a mortgage. Captive lenders can t offer personal loans, IRA s, or mortgages. Finance Companies Finance companies are your last resort. However, they are sometimes a necessary evil. It all depends on how low your credit scores are, and how important it is for you to buy a car. If you use a finance company, you re going to pay outrageously high interest rates. There s no way around it. So, here s what you need to know about finance companies If you re bankrupt and/or you ve missed any past auto payments a finance company may be your only option. 2. As much as I hate saying something positive about them, Capital One may be the best finance company to use because they have a tiered rate system. Most finance companies offer just one flat interest rate usually somewhere between 18% and 24%. Capital One, on the other hand, offers different rates, depending on your past credit history and credit scores. I ve even seen rates as low as 7.25% (with little-to-no money down). 22

23 3. If you must use a finance company, see if you can trade in your car for another car at a dealership that can give you a lease or loan at a captive lender, bank, or credit union at a lower interest rate. The rule of thumb is: wait until you re halfway through the loan with the finance company before you attempt a trade-in. Typically, for this strategy to work, your FICO credit scores must be at least in the mid-600s. 4. If your FICO credit scores increase within a year or two from buying the car you can shop around for a bank or credit union to re-finance your loan. Mortgages In many cases, a mortgage is easier to get after bankruptcy than a normal unsecured 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, but they only care about your middle score. Before you start the mortgage process, you ll need a middle FICO credit score of around 620 (although a few lenders will approve you with a 580 score). A middle FICO score of 660 gives you even better options in your rate, down payment, and fees. And of course, a middle score over 700 is the brass ring. Mortgage lenders will also look at your time after discharge when considering your application. Once you reach 2 years after discharge (if you filed Chapter 7), you re ready to apply with an FHA (Federal Housing Association) 23

24 approved lender. A Chapter 13 filer only needs 12 months after filing. Finally, mortgage lenders need to see that you ve established new credit after bankruptcy. 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. Unsecured s Once your FICO scores break 720, and you have at least 4-5 years from your discharge, you should be ready to apply for normal unsecured cards with prime lenders. And I m not talking about the low limit unsecured credit card offers you get in the mail right after your bankruptcy from lenders like Crapital One and First Premier Bank. With scores over 720, you should be able to be approved by several credit card issuers. Many will not accept you with a bankruptcy on your credit reports. So the goal is to screen lenders well before applying to avoid a credit inquiry. Good places to start are the local community banks, regional banks, and credit unions in your area. Just make sure you interview your lenders. Don t assume. 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. 24

25 11 Factors That Determine When to Apply for Credit Knowing when you re ready to apply for credit depends on several things 1. What you re applying for 2. What type of bankruptcy you filed 3. How much time has passed since your discharge 4. What your FICO credit score(s) are 5. How you ve paid your bills since your bankruptcy 6. What new credit you ve established since the bankruptcy 7. Which credit reporting agency they use to make a loan decision 8. If you re working at increasing your credit scores by attempting to get deletions 9. If you re increasing your credit scores by paying off, paying down, or removing inaccurate information from your credit reports 10. How much money you can put down (with some lenders) 11. If you have any other negative information appearing on your credit reports (e.g. foreclosure, charge-off, lien, etc.) 25

26 1. What you re applying for Lenders have different credit guidelines, or rules, to determine if they will approve you for credit. For instance, if you re seeking credit for a secured asset (i.e., car, mortgage, etc.) it s easier to get approved for than unsecured credit (i.e., bank credit cards). It s very possible you will be approved with one type of lender, but not another. My friends Randy and Holli purchased a luxury home two years after their bankruptcy was discharged. They also financed two new luxury cars. Feeling confident with their credit, they applied to finance a water softener after moving into their new home and were promptly DENIED. Different lenders have different rules. So it s important to know the rules your lender has before you apply for credit. How do you do that? You ask the lender before you apply for credit. 2. What type of bankruptcy you filed There are two main types of bankruptcy filings Chapter 7 and Chapter 13. If you filed Chapter 7 you should proceed to apply for credit the moment you re discharged. A discharge can usually take 90 to 120 days depending on how busy the court is in your area. 26

27 Chapter 13 bankruptcies work differently. This is when a filer agrees to pay back all or a portion of their debt over a period of 3 to 5 years. The thing to remember about getting credit with a Chapter 13 is that most new credit needs trustee approval during your bankruptcy. Once you become discharged you no longer need trustee approval. It s my belief that a Chapter 13 filer should focus on two things during their bankruptcy: increasing their credit scores and secured bank cards. Most lenders won t talk with you until you re discharged anyway. So even if you have trustee approval, it won t matter. You need a willing lender. The exceptions are: some secured bank card providers, mortgage lenders, and car lenders. 3. How much time has passed since your discharge The more time that s passed since your discharge the better but it s not the only thing with most lenders. For instance, FHA mortgage lenders specifically need 2 years after discharge from a Chapter 7 to qualify. Other types of mortgage lenders are stricter. Captive car lenders usually prefer six months after discharge, but that can be overcome with a down payment. Credit card lending guidelines seem to change weekly by lender. Low limit unsecured cards are easy to qualify for if you want that type of credit (but that is NOT recommended). Normal unsecured credit cards are challenging to get until your bankruptcy no longer appears on your credit reports, and they are the most difficult lender to get straight answers from before you apply. 27

28 4. What your FICO credit score(s) are The key to getting all the credit you want and deserve is to have the highest FICO credit scores possible. Some lenders will consider your score(s) the most important thing other lenders not so much. Car lenders care about scores, but look at your entire situation. Low limit unsecured bank cards are offered to anyone who can fog a mirror. Normal unsecured cards approval requirements are based primarily on FICO score, income, how long it s been since your bankruptcy, and your debt-to-income ratio. Secured cards are easy to get approved for (when you apply with the right lender one that likes people who filed bankruptcy). A score is important to an FHA mortgage lender, but only determines your interest rate. Bottom line a higher score means a lower rate. Conventional mortgages require a much higher score, money down, and more time after discharge. Forget about your local banker or credit union. Personal loans shouldn t even be considered until after the bankruptcy no longer appears on your credit reports. 5. How you ve paid your bills since your bankruptcy Late payments after bankruptcy are the kiss of death. One missed payment (if it can be explained) can be worked around for an auto loan, but anything more severe will send you into subprime financing with many lenders. A missed payment won t hurt your chances of a low limit unsecured bank card as long as you can still fog a mirror. Forget about a normal unsecured bank card with anything negative after bankruptcy. You re okay with a secured card as long as it s not too severe. Bottom line negative credit after a bankruptcy when trying to obtain retail cards is iffy at best. 28

29 However, when seeking an FHA mortgage, a missed payment here or there can be overcome with the right mortgage lender on your side. And it s possible to overlook a missed payment with a conventional lender (as long as it can be explained). To qualify for a personal loan, you need to have paid everything on time since your bankruptcy. 6. What new credit you ve established since the bankruptcy Most lenders don t like to be first to give you credit. There are three exceptions to this rule low-limit unsecured bank cards, secured bank cards, and an FHA mortgage. Everyone else prefers to see footsteps in the snow. The more you show a prospective lender that you ve re-established yourself and have paid your debts as agreed, the closer you ll be to getting approved. 7. Which credit reporting agency they use to make a loan decision We each have three credit reports. Most lenders use one of the three credit reporting agencies to make a loan decision. Find a lender that uses your best FICO score from the three reporting agencies and you re heading in the right direction. You know that mortgage lenders look at all three FICO scores and use your middle score, but what you may not know is that some luxury car lenders are pulling all three credit reports and using your HIGHEST score. This practice makes a lot of sense to me. Find out which credit reporting agency has your highest score and find lenders that use that score. 8. If you re working at increasing your credit scores by attempting to get deletions You won t receive a notice that says, You just got a deletion from your credit reports, please check your score. It s up to you to track the amount of deletions you receive, then decide when you should spend the money to purchase your three FICO scores or apply for a mortgage prequalification to 29

30 get all three scores. Even score monitoring services from FICO and Equifax don t acknowledge deletions. (However, I will say that FICO s score simulator is a great tool to monitor your progress.) 9. If you re increasing your credit scores by paying off, paying down, or removing inaccurate information from your credit reports Again, you won t receive a notice that says, You just paid off a credit card account, please check your score. It s up to you to track the this activity, then decide when you should spend the money to purchase your three FICO scores or apply for a mortgage prequalification to get all three scores. 10. How much money you can put down (with some lenders) This is especially true with car lenders and mortgage companies. Although it is very possible to get a no money down deal on the right automobile (financed by the right captive lender), an FHA mortgage does require a 3.5% down payment. (There are other sources for dealing with a mortgage down payment try If you have any other major negative information appearing on your credit reports Many people think they have done everything right, then go to apply for a loan, and get denied. This is often because there was another item such as a foreclosure or unpaid tax lien that appeared on their credit reports. Each lender deals with this differently. There may be work-arounds for some good auto and FHA mortgage dealers. Many secured card issuers will approve you, but it could affect your ability to transition into an unsecured card. Normal unsecured credit card lenders will not look kindly on most of these items. The same is true for personal loans and conventional mortgage lenders. 30

31 Where to Apply for Credit New Car Used Car Low Limit Unsecured Normal Unsecured Secured Card Retail Gas Card FHA Mortgage Conventional Mortgage Mortgage Refi Personal Loan Finance Company Loan Ford Motor Credit, GM, or Chrysler (in that order). Ask what options the dealer has and compare. Beware: Look at the terms and conditions. Avoidance recommended. Consider once your scores are above Try your local community bank, credit union, or regional bank. Ignore large national banks. When the economy improves in 5 years or so a 700 score will be good enough again to qualify. Look at a lender that specializes in offering secured credit cards. Not a lender who created a secured card as an afterthought, or one of their hundreds of financial products. Target Marathon Any FHA lender with experience in helping people who have filed bankruptcy. Once you have 4 years after discharge and a middle score over 680 try your local community bank, credit union or regional bank. Always approach your existing lender first. Small community bank, credit union, or regional bank. Start small, like with overdraft protection then work your way up. Avoid at all cost. 31

32 The Most Important Questions to Ask Lenders Before You Apply for Credit The following is a list of questions that you MUST ask a lender when you are trying to establish credit after a bankruptcy. By asking these questions you determine if you are working with the right lenders. 1. Do you review credit reports when someone applies for credit with you? (The answer will almost always be, Yes. ) 2. Since I live in [enter your home state here], which credit reporting agency do you use as your primary source for credit reports? (This answer will vary depending on where you live. The point is that you want to know which of your three credit reports a lender is planning on reviewing before you complete your application. And once you know the answer, you ll know to only apply for credit with lenders that use your highest FICO credit score.) 3. Do you use a FICO score to determine my credit risk? (Again, the answer will almost always be, Yes. ) 4. If the answer to #3 is, Yes, then, ask them... Do you use the regular FICO credit scores or FICO Industry Option scores? (You want to determine if they are using the standard FICO score or if they are using one of FICO s Industry Option scores especially for your auto lenders or credit card lenders. There s not much you can do about the type of score a lender uses, but it s still good to let the lender know that you know a lot about scoring and you re not going to be taken advantage of. That being said, the chances of them even knowing what an Industry Option score is pretty rare.) 32

33 5. How does a previous bankruptcy affect your lending decision? (This is where you will find out if the lender will automatically turn you down because of the bankruptcy, or if they will consider it if a certain amount of time has lapsed.) Once you get the answers to all of these questions, it s time to ask about the type of offer you re going to get. 6. If I have the highest FICO scores possible, what is the best rate you can offer me? (Now you ve just set your target rate. Anything less than that will cost you more in interest or you may not get approved.) 7. What is the minimum FICO score needed to get the best rate? (This will tell you right away if you are going to be able to get the best rate or if you ll have to settle on a higher rate.) 8. What is the minimum FICO score needed for approval? (This question is really reserved for people who have very low scores and need to see if they would even qualify. Remember, it s important to avoid a credit inquiry if at all possible. Asking this question will help.) 9. If I have a FICO score of [enter your FICO score here], what kind of deal will I get? (This should give you enough of the specifics of the loan that you can decide if you want to officially apply. The lender will probably have some questions for you about your income, etc. That s fine. Just don t give out your Social Security number. A two-way dialogue is your goal.) If you are talking to a lender that doesn t know the answers to these questions, or if they refuse to answer them, then you need to move on to another lender. Trust me, there are plenty of lenders out there that will work with you. You don t need to waste time with the ones that don t want to help you. Good luck and enjoy the experience! 33

34 How to Know When & Where to Apply for CREDIT Discover when your credit is good enough to get approved. All rights reserved. This Lesson can be freely distributed for personal use without permission, but may not be altered in any way. In addition, the Lesson, or any portion thereof, may not be used, copied, or distributed for commercial purposes for any reason without written permission from LifeAfterBankruptcy.com and Stephen Snyder.