May
10
Getting a Car Loan after Bankruptcy — Step Three: Get Secured Credit
May 10, 2007 | 1 Comment
Step three — Get a secured credit card or two. What’s a secured credit card? It’s a credit card secured by cash. For instance, you send the credit card company $500 and they’ll give you a credit card with a $500 limit. Send them a $1000, and you’ll have a credit card with a $1000 limit. Why are these credit cards so important for re-establishment? First of all, your credit limit (even though it’s backed by cash) shows as “available credit” on your credit report. The presence of available credit will encourage other lenders to extend you credit as well. Banks are a lot like sheep — when one bank gives you credit, pretty soon all of them will follow.
The trick with any credit card is to have it but not use it. When you first get your secured credit card, go buy something very inexpensive. Make sure you don’t spend any more than $50 on this first purchase. As soon as you’ve made your first purchase you should cut up your new secured credit card and throw it away. Then, when the first bill comes, pay it in full.
I know what you’re thinking — what’s the point? Why get a credit card if I’m only going to spend $50 and then destroy the card? The answer — credit reports are created by machines, and machines aren’t very smart. While these machines will know you have a card, they don’t know how much you’re using it. They will see that you’ve charged something, and they will see that you’ve made a payment, but what they won’t see is you throwing it in the trash. In fact, the credit report will show that you still have the card and that you’re STILL MAKING MONTHLY PAYMENTS, even though you have zero balance and you’ve really only made one payment. Because of the way our credit system works, payment history is assumed. Credit reports are built based on the assumption that everything is going the way that it should be unless the credit bureau is told otherwise.
When you make that first payment on time, the credit bureau will show your credit card is open and currently in use. Your credit report will then begin to show that you’re making payments every month on time. You have started building positive credit every month and it’s costing you very little (just the secured card’s annual fee). This is one of the best kept secrets of building positive credit history.
But you’re not just building payment history. If you follow this advice, other creditors will interpret your credit report very positively. They will see that you have a credit card, but that you have no balance and they will assume this means you’re paying your card off every month. That, combined with the payment history the credit bureau gives you, will convince other creditors you are credit-worthy.
When applying for a secured credit card, make sure to look for the following:
- Lowest annual fee possible, no more than $75
- Automatic upgrade from a secured to an un-secured card after 12 to 18 months with no annual fee
- Try to get a card that pays you interest on your cash deposit
- Make sure that it’s not a “debit” credit card — these aren’t credit cards at all and they don’t help you
- Make sure the credit card company reports to all three credit bureaus
Congratulations — once you have a secured credit card, you’re half way to becoming fully re-established. Ideally, you will complete this step within one or two months of your bankruptcy discharge.
While a secured credit card helps you build credit history, it does very little to improve your credit score. Credit history is based on payments and credit score is based on consistency. Having one or even two secured credit cards isn’t enough to build up your score (at least not very quickly). The quickest way to build your credit score after getting a secured credit card is to buy a car. You should begin this process about 6 months after your bankruptcy discharges, or three of four months after you’ve paid your first bill with your new credit card.
Don’t forget to hoard your secured credit card statements — they will help you get a car loan.
Getting a Car Loan after Bankruptcy — Step Four: Buy A Car.
Related Posts
Comments
1 Comment so far
[...] Getting a Car Loan after Bankruptcy — Step Three: Get Secured Credit [...]