Dear Liz: How do you repair credit scores after filing for bankruptcy? My husband and I are in this situation and are looking to reestablish credit and increase our credit scores. Also, how long do closed accounts appear on the credit report?
Answer: Filing for bankruptcy may have actually helped your scores. Researchers at the Federal Reserve Bank of Philadelphia found scores typically plunged in the 18 months before people filed for bankruptcy and rose steadily afterward. The average credit score before someone filed Chapter 7 was 538.2 on Equifax’s 280-to-850 scoring range. By the time filers’ cases were discharged, their average score was 620.3.
You can continue the upward trend with a credit-builder loan. These loans, typically offered by credit unions, put the money you borrow — usually $500 to $1,000 — into a certificate of deposit or savings account that you can claim once you’ve made 12 monthly payments. Your payments are reported to the credit bureaus, so you can build a decent credit history and your savings at the same time. If your local credit union doesn’t offer these loans, check to see if there’s a community development financial institution near you that does. You can find links to these at www.cdfifund.gov. Another option is Self Lender, an online company that makes credit-builder loans.
If you don’t already have a credit card, you can accelerate your scores’ rehabilitation with a secured credit card. You make a deposit, typically $200 to $2,000, with the issuing bank and get a credit line equal to that deposit. You should use the card lightly but regularly, being careful not to charge more than about 30% of its credit limit and paying the balance in full each month.
Another option is to wait until your scores are in the mid-600s and then apply for a regular credit card.
The bankruptcy will remain on your credit report for 10 years, but it will have less effect on your scores as time goes by as long as you continue to use credit responsibly.
Financial help for seniors
Dear Liz: In your response to the person whose friend was erroneously declared deceased by the Social Security Administration, you suggest that the older person consider finding help in managing her finances. Please recommend checking the American Assn. of Daily Money Managers for such help. I have a certification from this professional organization and we help thousands of people in this predicament. You can find more information at www.aadmm.com.
Answer: Handling the details of daily finances can get challenging as we age. Many people have trusted family or friends who can help monitor their accounts, make sure bills are getting paid and keep an eye out for signs of financial abuse. For those who don’t, a daily money manager can be a godsend.
‘Stay at home’ credit card isn’t foolproof
Dear Liz: Regarding updating automatic payments when a credit card is replaced, I have found that using a separate credit card that never leaves home for automatic payments is a good idea. It’s very unlikely that this “stay at home” card would get hacked like a card I use in stores or ATMs. Does this seem like a good idea?
Answer: The security advantage of hiding a card at home is “pretty minimal, and approaching zero,” said Bob Sullivan, consumer security expert at BobSullivan.net and author of the book “Stop Getting Ripped Off.”
Any credit card can be hacked, as numerous database breaches have shown us. Once you use the card — with a merchant, at an ATM, on the Web or over the phone — you have no control of where its numbers are stored or how secure those databases are.
“The risk that it’s stolen from a database of cards outweighs the risk that a waiter or a compromised machine might steal it,” Sullivan said.
It may be more convenient to monitor automatic payments if they’re all on one card. But if the card is hacked, you’ll still have to reset all those payments.