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Back in the
day, if someone had gone through bankruptcy or foreclosure, rebuilding
a credit history was a relatively straightforward process. One of the
first steps included obtaining a secured or unsecured credit card and
making on-time payments each month for a year or two. Over time the
person's credit rating improved, which would then allow him or her to
obtain a sub-prime mortgage.Those days are long gone. Now when clients call asking how soon they can obtain credit after a foreclosure, I find myself saying, "I don't know." Because the sub-prime lending market has dried up and because banks are now scrutinizing consumers more closely than ever, it's become very apparent that rebuilding one's credit in any meaningful way is going to be a three to five year process, if not longer.
And, instead of simply rebuilding credit worthiness via carefully handling new credit opportunities, consumers need to rethink how they should handle their finances. What follows are the three pieces of advice for people people who have been through foreclosure and want to rebuild their credit -- and their finances.
1. Think saving instead of spending
It's a fact -- our society is mentally in spend mode. We're all constantly inundated with advertising to purchase material goods from a very young age, which can lead many people to consciously or unconsciously visit the mall as a form of recreation - that is, engage in constant spending and chronic debt.
Consumers who have gone through foreclosure need to shift their mentality from "I need more credit" to "I need to save money." This is one reason I advise clients in foreclosure to see it as a great opportunity to get started on a savings plan. Since foreclosure often takes many months, and since no payments towards shelter need be made during that period, people can pay some or all of their mortgage to themselves and come out of foreclosure with considerable liquidity.
Having a savings account - and a cash cushion - greases the skids on finding good shelter after foreclosure, looks good on the consumer's credit report and helps people feel more secure financially. And hopefully, savings will beget more savings.
Habitual overspending is very difficult to overcome. If you think your customers have a spending problem, you can recommend books, such as Jerrold Mundis' classic, How to Get out of Debt, Stay Out of Debt, and Live Prosperously. Mundis, who was greatly in debt himself, gives complete instruction on how to stop using credit cards and learn how to track expenditures. Millions of people have used the book to get out of - and stay out of - debt.
Chronic debt problems can affect all areas of people's lives, including marriage and career. Those with serious financial issues may want to join Debtors Anonymous. A self-help 12-step program like Alcoholics Anonymous, Debtors Anonymous gives people tools to regain control of their lives.
2. Learn how to live more simply
People tend to rack up credit card debt because credit gives us an artificial rise in salary or income - thus encouraging overspending. It also dissociates us from the physical reality of money.
Think about it this way: how often, when watching a sporting event with friends, do you eat chips or other snacks without really thinking about what you eat - only to notice you've eaten the entire bag once it's empty?
It's the same for credit cards. We
blithely sign the slip at a restaurant while talking with our friends
or business associates or we'll sign sales receipt after sales receipt
while shopping at the mall - and then we're shocked when the bill comes
in. "Wow! Did I really spend that much?!" you'll say to yourself.
To help your clients out of the spend and debt hole, you can counsel them to decrease the amount of spending by living more simply. You can recommend groups that practice "voluntary simplicity," or books such as Simplify Your Life: 100 Ways to Slow Down and Enjoy the Things that Really Matter by Elaine St. James. Her tips include the tried and true, such as buying in bulk and reducing clutter, to the more "spiritual," such as spending one day a month in solitude to changing your expectations.
3. Take the slow road to rebuilding credit
The third step to rebuilding credit is to obtain a secured credit card from a major bank. A secured credit card is linked to a checking or savings account - from which the payment is deducted should the cardholder not pay the bill. Hence, the card is secured by the cardholder's own money. Counsel your customers to use the card to buy a little bit, then pay it right off - on time! - so that they can begin to rebuild their credit history.
Once a person has responsibly handled a secured credit card, he or she can then apply for an unsecured card - with a greatly reduced limit, such as $300. Having a low limit ensures that the person doesn't get into credit trouble again. I recommend to clients that they limit themselves to this one card, and again, to use the card to purchase something little, then pay the bill in full and on time. Over time, the credit limit will be raised, which in turn will raise the person's credit score.
Once a major credit card is obtained, the consumer must stay disciplined so as to not start the spending-debt cycle all over again. Counsel your customers to take their time getting back on the credit hamster wheel and to enjoy saving their money and living more simply.
Stephen R. Elias is an attorney and former associate publisher at Nolo, as well as current President of National Bankruptcy Law Project. He is the author of many Nolo books, most recently The Foreclosure Survival Guide. Steve has been featured in such major media as The New York Times, The Wall Street Journal, Newsweek, Good Morning America, 20/20, Money magazine, and more. He can be reached by email at: steve@bankruptcylawproject.com.
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