In these tough times, there are many people who are living on a very tight budget. In fact, that’s probably the reason for filing bankruptcy in the first place. If you’re a regular reader of this blog, you know that it’s crucial to start rebuilding your credit by establishing NEW credit AFTER your bankruptcy.
But what if you don’t have enough money to “rebuild” your credit after bankruptcy?
First of all, it’s not necessary (and often not recommended) to go to someone who is in the business of helping people rebuild credit. Why? They don’t do this for free. They pay themselves – often very well – out of your hard earned money. And although there may be some good ones out there, you need to be careful because some of them really don’t have your best interests at heart. They may not do a very good job. With a little bit of time and effort, you can do just as good, if not a better job of rebuilding your credit than they can.
A Secured Credit Card is one of the best ways to establish new credit after bankruptcy
One of the best, and most recommended ways to establish new credit after bankruptcy in Canada is to get at least one secured credit card. In Canada, when you claim bankruptcy, you need to surrender ALL of your credit credit cards – even if they have a zero balance. You are not allowed to have ANY credit during the time you are an undischarged bankrupt (usually 9 months). So when you’re finally discharged, you have no credit cards and you won’t find any companies willing to give you an unsecured credit card. Even getting a secured credit card isn’t easy. Some banks won’t issue secured credit cards to people who have a bankruptcy on their credit reports, or at least for 2 or 3 years after the discharge (I ran into this problem at TD Canada Trust when I applied for their secured Visa card). It seems they prefer to offer credit cards to new Canadian citizens or young adults with no credit history.
A quick refresher… a secured credit card is credit card secured by a deposit you send in. The credit limit is usually the same amount as your deposit. For example, if you send in $1000 for a deposit, your credit limit will be $1000. However, it’s not unheard of for some card issuers to ask for more of a deposit, like double the amount of the credit limit. Secured credit cards like Peoples Trust MasterCard and Home Trust Visa don’t do it that way. Their minimum credit limit is $500. If you have to save up for a while to get $500, you should definitely do so. Then work on increasing your credit limit to something more realistic in this day and age, like at least $1000. You can increase your credit card limit in increments of $100. So, once you get past the hurdle of the initial $500, you may find it easier to send in $100 every few weeks or months.
After Bankruptcy Car Loans
Another popular form of credit after bankruptcy is getting a car loan. I highly advise AGAINST many of those “Buy Here, Pay Here” used car lots or sub-prime, high-risk (and usually VERY high interest rate) car loans. Not only is this an expensive way to get a car, it will actually look bad on your credit report. Those car lots may try to convince you that you’re rebuilding your credit, but a few years later when you go to a reputable lender for a car, house or apartment, and they see “Billy Bob’s Buy-Here Pay-Here Used Car Lot” on your credit report, think about how that will look to them. The lender may think you’re only worthy of last chance, high risk financing and may decline your application. Or offer it at a high interest rate. Or ask for a co-signer.
Many times, those high interest sub-prime car loans are on overpriced used cars. If you can wait a bit longer, wouldn’t you rather have a nice, brand new car? Not to mention, it will certainly look better to see a mainstream new car loan on your credit report than a sub-prime used car loan. Plus, new cars tend to be more reliable – even the more modest cars. If you are in a position to get a new car loan after bankruptcy, congratulations! But remember to keep it modest. A $15,000 sedan or $20,000 minivan will get you to work or haul your kids around just as easily as luxury car or fancy SUV costing thousands more. You probably won’t get approved for more than you can afford anyways, but rather than spending to upper limit of your budget, try saving a bit of money and get something more modest.
To Co-Sign or Not to Co-Sign – that is the question…
Do whatever you can to avoid using, or being a co-signer. As someone needing a co-signer, future lenders may again request you to have a co-signer “just to be safe.” And if you’re the one co-signing for someone else, don’t do it. That’s a great way to hurt a relationship with a friend or family member. Co-signed loans tend to have a high rate of default and the co-signer often ends up with making the payments or risk harming his or her own personal credit. Just watch a few episodes of Judge Judy or any of those court TV shows. Not to mention, if you’re over the age of 25 and need a co-signer, it doesn’t look on you.
Do whatever you can to get the loan on your own, or do without. Having said that, there are some circumstances where you may truly need a co-signer for a car or an apartment. You may need to use a co-signer, or consider moving someplace where you don’t need a co-signer for an apartment or moving closer to work so you can walk, carpool or take public transit. That’s probably better than going into debt on a high interest loan or roping in a co-signer. So, you won’t be establishing any new credit, but in this case, you’re better off without!
Rebuilding Credit takes some effort, but don’t put yourself in a hardship situation over it
The bottom line is that if you can’t comfortably do it, don’t do it. Now, anything worthwhile will usually require some effort. Above-average results will require above average effort! So if that means cutting out luxuries like high end cable TV packages, extra phone lines or eating out on a regular basis, so you can save some money, so be it!
If you absolutely must have a car, you may be able to get by with the one you’ve got. If you’ve got young children, live in the suburbs or out in the country or have a job that requires you to have your own car, you many not have a choice. If your current car is old and in need of some repairs, you may have to work with what you’ve got. It’s NOT a wise idea to get a new car just because you want something that looks nicer or you want an extra line of credit reporting to your credit reports. If you cannot afford a new car, then don’t do it.
If you must have a car, can you make due with your old one?
Let’s say your current car has 200,000 kilometers on it, is old, dented and faded and needs a $1500 transmission repair, but is otherwise fine. Get over the fact that it’s old, faded and dented. At least it’s fully paid for! And that $1500 repair may seem steep for an old car, but if that’s all it needs, then you’ve probably just bought yourself some more time to save for a new car.
A new car loan payment could easily be $300 to $500 a month. That transmission repair is 3 to 5 months worth of car payments. You might get another 1, 2, 3 or more years out of that car! THEN, you can look at a new car. Sure, you won’t have the benefit of timely payments on a new loan reporting to your credit reports, but this is more realistic. You’ll have plenty of time to rebuild your credit and save up for a new car.
If you’re a low income earner, don’t put yourself in a hardship for the sake of rebuilding your credit. I’m all for ex-bankrupt Canadians rebuilding their credit, but not if it will severely strain them.
Can you find a way to earn more money?
Another option is to earn more money. Consider a part time job, asking for a raise, working self-employed on the weekends using a skill you have, or even selling some of your unneeded items on Kijiji or eBay. There are many ways to make the money.
Do what you can to save up and start re-establishing your credit. The sooner the better, but if you have to wait a while, do what you have to do. And the easiest way to rebuild your credit, even if you don’t have extra money for a secured credit card or a car loan, is simply to pay your bills on time. Some may report to the credit bureau, but many do not (unless you are late and the account goes into collections, then it will appear on your credit report). There’s nothing worse than having a collection appear on your credit report after your bankruptcy has been discharged! That would just about ruin any chances of getting a car loan, mortgage or apartment, or most other forms of unsecured credit.