Credit Rebuilding

Since I know this is a point that a lot of people worry about, I thought I'd share my experiences with credit rebuilding. There's really no magic to it, and despite what all the expensive books and credit repair companies say, the truth is that it just takes time.

In my case, here's a timeline of what I did:

• Early 1997 - Opened an American Express account. AMEX, provided that you don't owe them any money and don't include them in your bankruptcy, seems to be willing to keep your account open if you file. I don't know if this is still true, but I opened the card earlier in the year thinking that I might file later. I used it a few times, paid it off every month and left it sitting in a drawer.
• June 1997 - Stopped using my credit cards, went to paying minimum payments on all bills in preparation of filing.
  
• September 1997 - Bankruptcy filed.
• October 1997 - Received re-affirmation agreement from Citibank. Since I only owed them about $500, and I knew I'd need to have a Visa or Mastercard for work-related travel and expenses, I reaffirmed. I had to fight my lawyer tooth and nail on this -- he felt that I should reaffirm nothing. I'm glad I did, because I have a very low interest rate on this card (about 10% now) and a long, positive credit history with this company.
  
• January 1998 - Bankruptcy discharged.
• February 1998 - Bought a secondhand pickup truck. I got hugely crappy terms, at 21% APR. In my opinion, recently bankrupt people should never buy a new car. If you have to buy a car at all, buy the cheapest one that will meet your needs. I bought a truck because I was living in an RV, and my nine-year-old 4-cylinder Toyota was wheezing to an early death from all the towing.
• September 1998 - A tree totaled my RV, so I used the insurance money and a 401(k) loan to pay off my truck loan and purchase a secondhand trailer.
• Early 1999 - I applied for a Capital One secured credit card. Yes, Capital One can be crappy to deal with, but they seem to have the fairest terms for people with sucky credit. They do have an interest-free grace period, and pay interest on your security money. If you pay your bills on time, after a year they will convert your card into an unsecured card. Although I've heard complaints about Capital One, they aren't nearly as bad as some of the other predatory lenders. Beware of any company that expects you to pay a non-refundable fee for the luxury of getting a credit card. It's a screwed deal, and you should pass it up.
• August 2001 - Applied for home mortage. I was turned down, but we got the house anyway. My partner applied alone, and we did a no-doc loan. The interest rate was 8.25%, and we had to pay PMI, which wasn't great, but it was better than no house!
• Sometime in 2002 - Applied for a business credit card. I was turned down, but my partner was approved, so I was just added to the account as an authorized user.
  
• April 2003 - Refinanced our mortage, and the bank approved me as well as my partner. The bankruptcy (and the fact that we were self-employed) gave us a slightly higher rate at 6.00%. However, it's a fixed-rate, 30-year mortgage, so we can't complain too much. (Interestingly enough, my average credit score at this point was 666!)
  
• September 2004 - Applied for a Sears card. Turned down flat. When I got the rejection letter in the mail, "prior bankruptcy" was the reason given for the turn-down.
• November 2004 - Considered applying for a home equity line of credit, so we pulled our credit reports with scores. It turned out that my partner, who had a dispute with a credit card company the year before, had been reported 30 days late. My lowest score was 723, but my partner's were no longer good enough to qualify for the best rates, so we passed on the idea.
  
• July 2005 - Applied for a music store credit card. To my suprise, I was approved and given a pretty high limit. Woo-woo!

Some of the lessons I learned along the way:

• Credit card companies are not your friends - Always read the fine print before you apply, and make sure that you understand their terms. Many companies will use a bait and switch technique where they will invite you to apply at a really awesome rate, review your credit, and then give you lousy terms.
• Don't buy a car using dealer financing - Credit unions, I found out later, almost always have better terms, even for people with crummy credit. Don't let a predatory lender take advantage of you. If you have no other choice go with the crappy loan, but buy the cheapest vehicle you can get by with, and double or triple your payments. Better idea: buy a really cheap junker and pay cash!
  
• Pay your bills on time every month - Okay, maybe it means you are going to be eating generic macaroni and cheese for the rest of the month. Never pay a bill late if you can possibly help it.
• Learn the difference between wants, needs, and emergencies - A "want" is something you can get buy without. When your kid tells you, "but Mom, I need a new iPod," it's not a "need", it's a "want." A "need" is something you can't do without, like decent, nutritious food, or gas for your car so you can drive to work. An "emergency" is something that you really can't do without. Your home theater system breaking is not an emergency, and neither is the dent in your car door. An "emergency" is something like your only car busted it's timing belt, so you have to get it fixed.
• If you use credit cards, pay them off every month - The only exception is if you are paying for an emergency that you can't otherwise cover. If you have to carry a balance, pay at least two or three times the minimum payment. As the minimum payment drops, don't reduce what you are paying -- keep paying two to three times the original payment, or more if you can afford it. Don't let debt evolve into an anchor.
  
• Open a savings account, and put money in it every month - Even if you still aren't earning enough after you've filed bankruptcy, put something away. Even if it's only $25 a month, it's still something. If you can afford more, by all means, do it. Become a saver, not a consumer.
• Never file bankruptcy again - Remember the mistakes you made that got you into the mess in the first place, and don't repeat them. In most cases, bankruptcy isn't a sudden surprise. It's usually a slow decent into financial chaos, that's usually started with a few bad decisions and then culminated by a stroke of bad luck. In my case, I could have avoided bankruptcy entirely had I not invested/borrowed so much money to keep a dying business alive. If I had been smart and cut my losses several years before, I wouldn't have gotten in over my head. Hindsight is 20/20 and there's no rewind button on the VCR of life, so learn from your mistakes and don't repeat them.