I often get asked the question, “What do I need to do to fix my credit score after a bankruptcy?” Unfortunately the answer to that is to get another credit card. Most of my clients are reluctant since over use of credit card was what caused them to need bankruptcy relief. However, having a credit, using it and paying it off is one of the most important ways to rebuild credit. The credit rating bureaus put heavy weight on the debt balance to available balance ratio or credit card utilization. For example: If you owe $4K on a card with a credit limit of $5K, your debt to available credit ratio is 80%, which is not good. They want to see that number closer to 30%. On average, individuals with 30% has a 620. Now, not having a credit card or not using it will actually cause you harm. For individuals with no balances, their average score is 692.
I know, it’s a terrible system that we are forced to participate in. However, there is hope! Since the Great Recession, Congress passed and Obama signed into law the The Dodd-Frank Wall Street Reform and Consumer Protection Act (See below for more details of the act). This act primarily regulates the financial industry in how it conducts business so as not avoid the financial crash we all experienced during the Great Recession.
The act also contained consumer protection laws that are making your credit report and score more transparent! Now the credit score that we were being so judged on but had to pay to see is beginning to be offered to consumers for free! The BEST resources I can direct you to is creditkarma.com. The website is owned and maintained by Transunion, one of the credit bureaus. If you go to their website and sign up for a free account, you can monitor your credit score and credit report with Transunion AND recently added Equifax, on a daily basis! They also have an app for the i-phone so you can check on the go! I recommend all my clients to get this app and I check it often myself. It’s an invaluable tool to financial security. If you have other questions or concerns, please feel free to contact me.
More Details on the Dodd-Frank Reform Act.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Obama on July 21, 2010 and passed as a direct response to the Great Recession. Most of the act regulated the financial industry, but there were also significant consumer protection reforms (creation of the Bureau of Consumer Financial Protection. See: http://www.consumerfinance.gov/) and tightened regulation of credit rating agencies (creation of an Office of Credit Ratings).
The act also created mortgage reform and anti-predatory lending practices. It created new foreclosure defenses by allowing borrowers to allege the loan is predatory through a violation of the “ability to repay” standard or that the mortgage has excessive fees or abusive terms. There are no statute of limitations to bring that defense. Provisions requiring prepayment penalties or mandatory arbitration are prohibited. It all changed existing mortgages by disallowing balloon payments and the practice of encouraging default on an exiting loan when refinancing.