Factors That Affect Your Credit Score

Other factors that affect your credit score include your payment history, the amount of money you owe, the length of time you’ve been in the credit system, the kinds of credit you have used in the past, and the amount of credit you’ve applied for recently. 

Apart from all these factors, there are other factors that banks look at when deciding whether to make loans that have nothing to do with your credit score.  These factors include your debt-to-income ratio (which is improved by bankruptcy), your employment history, address history, and the amount and kind of property that you own.

Sign A Reaffirmation Agreement

Assuming you had to file bankruptcy, you should make affirmative efforts to repair your credit once your bankruptcy is over.  If you do not use credit and use it responsibly, your credit situation will not improve.  In my opinion, rather than taking out new loans the best way to improve your credit after bankruptcy is to continue making payments on your house or car. 

Unfortunately, however, these payments will not be reflected on your credit report unless you signed a reaffirmation agreement, which is an agreement that gives creditors the right to report this kind of information. 

Not everyone is eligible to sign a reaffirmation agreement, and the bankruptcy court will not permit reaffirmation of loans you cannot prove to the court you can afford.  If you are not eligible for a reaffirmation agreement you can usually still keep your house and/or car if you are willing to continue making payments, but those payments will not be reflected in your credit report or help improve your credit score.

Improving Your Credit

If you do not currently have a home loan or auto loan that can help improve your credit after bankruptcy, there are other options.  Automobile financing companies are anxious to make loans to many people post-bankruptcy because they do not owe money to other creditors anymore and the auto financing company does not need to worry about standing in line behind other creditors to get paid. 

Secured credit cards, which are credit cards with a maximum balance that only goes up to an amount you put on deposit with the issuing bank, are another option.  However, if you plan to use secured credit cards to rebuild your credit, make sure that the bank that issued the card reports to the credit reporting agencies– not all of them do. 

A third option is to use credit at stores like Best Buy and Home Depot.  It is easier to get credit at stores like these because the stores are trying to give you an incentive to buy their goods.  Another option that is risky, but very effective when done correctly, is to become a co-signer on a loan taken out by a friend or family member. 

Just make sure that your friend or family member has a rock-solid ability to pay, because if they do not pay you will be held accountable for the loan.  I have seen cases where parents with rock-solid social security and pension income allowed their children to go on auto loans as cosignors in order to help improve those children’s credit after bankruptcy.

A Common Credit Misconception

One common misconception that people have is that they need to carry a balance on their credit cards in order to improve their credit rating.  That is not true, and I would not recommend it.  The goal is to use credit to improve your credit rating, not to put yourself in a situation where you might get into debt problems again.  Use your credit card to make ordinary purchases like groceries and gasoline and pay it off at the end of every month.

I have a computer program that helps estimate people’s credit scores one year out from bankruptcy, assuming responsible credit usage.  If your credit score is currently in the mid- to low-500’s, like many of my clients, you can expect to see an improvement of somewhere between 90 to 110 points. 

However, if your credit score is higher, the improvement will be more modest.  From time to time I do see clients with credit scores in excess of 700 who nevertheless decide to file bankruptcy because the only way they have managed to maintain their credit at that level is by putting a very large amount of their take-home pay towards their credit card debt in a losing battle to pay it off. 

For those people, bankruptcy will lower their credit score significantly, but in many cases I believe the damage was inevitable because they were in over their heads and certain to default on their credit card payments eventually.

Ask A Cleveland Bankruptcy Lawyer

If you have questions about improving your credit score post-bankruptcy, please call me at (216) 526-0309 and I will answer those questions at no initial cost to you.

Most of my bankruptcy clients in Cleveland have credit scores in the low- to mid-500’s, which is bad.  If this is you, cheer up because a Chapter 7 bankruptcy combined with one year of responsible, documented credit usage is likely to improve your credit score between 90 to 110 points.  However, you will need to use credit and use it responsibly in order for this to occur. 

The easiest and safest ways to improve your credit after bankruptcy include home loans you had going into bankruptcy, car loans and secured credit cards, which are credit cards secured against funds you leave on deposit with a bank.  For more information about how to improve your credit after bankruptcy, see my post, “How to Repair Credit After Bankruptcy.”

Who should worry about their credit being damaged by bankruptcy?  I have had many clients with credit scores in the mid or even high 600’s, but who were maintaining those credit scores only by putting a huge percentage of their monthly take-home pay towards existing credit card bills.

Bankruptcy does, technically, hurt those people’s credit scores, but I question whether there is really any alternative to that damage.  In other words, I believe that these people’s credit was already doomed due to snowballing interest on their credit cards and other debts, and it was only a matter of time before they became unable to make their monthly payments and defaulted, ruining their credit anyway. 

The bottom line is you have to be honest with yourself and face the truth:  If you are going to be able to pay your bills not only today but in the long-term then fine, but if you are stuck in an endless cycle of debt and interest payments it makes sense to admit to yourself that you are in over your head and seek legal counsel as soon as possible to find out what your options are.

If you’re looking for a free consultation with a bankruptcy lawyer in Cleveland, Westlake, or any of the surrounding counties, feel free to reach out to me at any time at (216) 526-0309.

But unlike ordinary refinancing, where one company simply steps into the shoes of another one– albeit at a lower interest rate– redemption can actually lower the principal amount owed on your vehicle.  Specifically, it can lower the principal amount owed on the vehicle to the true market value of the vehicle. 

For example, if you owe $10,000 on a vehicle with a Blue Book value of only $3,000, we might be able to knock $7,000 off of the amount owed.  Instead of having to pay $10,000 you would only have to pay $3,000 over the life of the loan (plus interest), and your monthly car payment would be almost nothing.

Unfortunately, there are some limitations on the ability to redeem your vehicle.  The biggest one is that you have to be approved for the refinancing.  Redemption is not possible if the refinancing company will not approve you for a new loan, which might happen if, for instance, you have a very low income or no income at all. 

Redemption is also typically not possible with very old, damaged or high-mileage vehicles, because they have almost no value as collateral.  The refinancing company needs valuable collateral to protect itself in the event you do not continue making payments, and it will not approve a loan where the vehicle is not valuable enough to provide this kind of protection.