How I Used a Personal Loan to Improve My Credit Score

A good credit score is hard to get and even harder to maintain but learn how I improved my credit score after foreclosure with a personal loan.

Updated on December 29, 2024.

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Have you ever felt like your finances were spiraling out of control? I’ll raise my hand first. Actually, I’ll raise both hands. But it’s not all doom and gloom!

In this post, I’ll share my story of how a series of unfortunate events beyond my control, such as hurricanes which lead to foreclosure, destroyed my credit score, which hovered between 750-780 points at the time. I’ll also explain the steps I took to rebuild my credit and offer advice on how you can avoid the same pitfalls, build up your credit, and take steps towards financial freedom.

Key points:

• Getting a secured personal loan or credit card is one way to improve your credit score.
• Be careful with interest only loans and mortgages.
• The credit reporting system does not know what assets you have.
• Simple steps will help you improve your credit score like it did for me after foreclosure.

Hurricane, Foreclosure, Recession: How I Lost (and Regained) Financial Control

Many moons ago, my credit score was shot. It started slowly and picked up speed from there. Comparing it to the proverbial snowball wouldn’t do my situation justice. It was more like an avalanche! What triggered it? A better question is, what didn’t trigger it? Bu it all started with a foreclosure.

In 2005, the eyes of Hurricane Katrina and Wilma passed over my home, resulting in substantial damage. The insurance company refused to pay for the damages. Here is a hard lesson learned. Insurance companies are not in the business of cutting checks to their customers. It’s a business. Never forget that. Unfortunately, this is common after natural disasters, where insurance companies are facing hundreds of millions of dollars in losses.

In my case, without even an inspection done on my home, the insurance adjuster stated that the damages would not be covered because the developer did not construct the home properly. Let me repeat that. They made that conclusion without ever inspecting the house, and yet, at the same time, they provided insurance for all those years that I had the home. Contradictory, to say the least.

As an attorney, I knew that their statement was ridiculous. It was a delay tactic on their end, hoping I would get tired and frustrated and give up. Mortgage lenders did the same during the mortgage foreclosure crisis, where the lengthy process started with waiting on the phone for hours at a time—all part of their plan. Yes, I have no issues calling out what businesses do. My cynicism with two decades plus of practice is always on display.

Of course, in 2005, is also when the bankruptcy law was changed to what we know today as the Bankruptcy Abuse Consumer Protection Act. BAPCPA, as it is known, was signed into law on April 20, 2005.

Because the general public believed that it was now virtually impossible to qualify for bankruptcy, the bankruptcy filings after that dropped substantially. Of course, this was also during the real estate boom, so bankruptcies were down anyway as mortgage lenders allowed homeowners to use their home’s equity as an unlimited and personal ATM. With those two factors, especially with the passing of BAPCPA, I lost half of my income overnight.

A few months later, I am digging into my savings to keep my law practice running. On August 23, 2005, Hurricane Katrina comes into the picture.

The Straw that Broke the Camel’s Back

With as much as 16 inches of rain, the Category 5 hurricane, with wind speeds of 80 miles per hour, caused substantial roof damage and knocked down my wooden fence on all three sides. But it didn’t end there.

On October 24, 2005, Hurricane Wilma made landfall in Miami. While Hurricane Wilma dropped much less rain, approximately 1 to 2 inches, it packed a powerful punch with wind speeds exceeding 85 miles per hour and wind gusts over 105 miles per hour.

The eyes of both Hurricane Katrina and Wilma passed over my home. Both hurricanes were two of the most damaging hurricanes that Florida has experienced.

At this point, I realized that a real estate market crash was inevitable. Whether it was the change in bankruptcy law, homeowners not being able to collect from their insurance companies, forcing homeowners to walk away from their homes, a situation experienced in 1992 with Hurricane Andrew in Miami. But more importantly, the interest-only loans were coming due.

Between research and noticing that many of my clients had interest-only loans, the writing was on the wall.

What Are Interest-Only Loans and How it Caused the Foreclosure Crisis

Interest-only loans are loans that during x amount of time, the debtor only pays interest on the loan, not the principal. An example of how interest affects debt payments can be seen via this link from a prior post.

When paying back a debt, you pay the principal, the amount borrowed, plus interest. The interest is what makes money for the lender. To get potential homeowners qualified for mortgages, mortgage lenders now offered interest-only loans, skipping the principal for a while.

For example, imagine your interest-only mortgage is $500, but your rent is $1,500. Obviously, you can afford the mortgage, that is, until the principal kicks in. All of a sudden, a homeowner may see their mortgage payments double or triple. Ultimately, the homeowner ends up in foreclosure.

This led to changes in the law because in part, mortgage brokers and lenders were not clearly explaining to their clients what they were about to get into. They also preyed on those who would not have an understanding of these loan products, hence the term predatory lenders.

In addition, another group of homebuyers attempted to time the market and planned to sell the house before the principal and interest were due on the mortgage. Many of these homeowners already had a home, and to come up with a deposit on the second home or investment home, they borrowed against their equity. When the real estate market crashed, many lost both houses, not to mention their marriages, because of the financial stress.

Once the mortgage foreclosure crisis hit in 2008, homes were reduced by as much as 50 to 75% in some areas of Florida. Endless neighborhoods were ghost towns.

Wall Street’s deregulation meant lenders were qualifying everyone for a mortgage. Which means sooner or later, there would be mass defaults on mortgages to be followed by foreclosures. It was common back then to hear a mortgage broker say that if the person has a pulse, they can get them approved. I believe that was even said in an excellent movie that defines this era and this issue, the “Big Short,” with great actors such as Christian Bale, Steve Carell, Ryan Gosling, and Brad Pitt.

As if that wasn’t enough, things continue to worsen personally. Even though I was paying all my creditors timely and more than the minimum monthly amount, one creditor decided to reduce my business line of credit.

Creditors Take Action Destroying My Credit Score

This creditor reduced my available balance to the actual balance currently owed. For example, if my credit limit was $20,000 but I owed $10,000, the creditor reduced my available line of credit to $10,000. So, no matter what, I was always maxed out with that creditor, which destroyed my credit score and credit utilization ratio. You can read about the credit utilization ratio and how it works in a prior post by clicking on this link.

That one creditor caused panic among other creditors who reacted the same. This common occurrence is well documented. For example, I read one story about a wealthy businessman who had his credit cut off, but for different reasons.

In his case, he was a black man who stopped for a quick buy at a Walmart in a less-than-desirable neighborhood for creditors. What I mean by that is the computers were sounding off alarms because a black person shopped at a Walmart where, in that specific location, there was a high rate of bankruptcies. Little by little, his creditors panicked and reacted by cutting off his credit. I believe former President Barack Obama passed a law preventing creditors from reacting to what other creditors do. Unfortunately, that was after I had to deal with this issue.

I’m in Panic Mode Now!

I contacted all my creditors, who all admitted that even though I was paying timely and more than the minimal payment, they were doing this to protect me. What a load of you know what. They weren’t concerned about me at all. If they were, they would let me use the available lines of credit I had to continue to keep the lights on.

Of course, at the end of every phone conversation, creditors said I was still liable for the debt. Trust me, I made it clear that I would only make further payments once they reestablished the original credit line. They didn’t and then came a long line of defaults with my creditors.

At this point, the only creditors being paid were for my car payment and mortgage. Three years after Hurricane Katrina and Wilma, I settled with the insurance company, as I was days away from filing a lawsuit, which I did not want to do as I don’t practice civil law, and that would also cause me to redirect my focus away from my clients.

Unfortunately, I saw the amount of foreclosures slowly increasing, and I knew it was the beginning of the end for the real estate market. I did try to sell my house, but nobody was buying at that time. I also tried to short-sale my house, but to be honest, the bank was not as familiar with the process as it was later on, so this is one of those moments that being ahead of my time did not help me personally.

Mind you, I was getting offers that exceeded the price of homes in the area, including one area where the houses were more expensive because they were on a lake. One offer was $100,000 more than my neighbor’s, yet the bank still said no!

Living by myself in a four-bedroom home with a pool, besides the mortgage payments and maintenance cost, cashing in on my savings to stay afloat, and losing income every day, it was time to walk away from my home. Next stop: foreclosure!

Being Positive!

On a side note, I came across a photo album approximately a month ago where I kept hundreds of photos to use as evidence of the damages to the insurance company. Once I realized those pictures were still in my possession, it was time for a beer and a cigar and watch those photos burn in the fire pit. I believe in not keeping anything if it reminds me of something I consider negative.

Avoiding Creditors and Bad Credit

As you can imagine, my credit score was horrible. I started depending solely on using my debit card and hoping that my practice would continue to produce enough income to avoid bankruptcy. Luckily, my business thrived again, but I had bad credit.

Trying to avoid creditors filing lawsuits against me, I laid low, and being self-employed is probably the reason why no creditors decided to sue me, realizing that suing a lawyer with no assets who is self-employed was probably a waste of their time and money.

Maximize Savings with Credit Card Balance Transfers

I patiently (I had no choice) waited for the next ten years for the negative statements on my credit report to disappear one by one. It was now time to build up my credit. How I did so was easy enough. While there is always the option of using secured credit cards to slowly but surely increase your credit score, I did it with personal loans.

There’s Light at the End of the Tunnel with a Personal Loan

I had settled a personal injury case, went to a bank where I had no accounts, and asked to open up a new account with $10,000, which was the attorney’s fees I had received. Gladly, the bank opened a new account. That’s when I turned around and asked for a personal loan on the $10,000 they already had. The lady opening my account smiled because she knew what I was doing.

I asked for the term of the personal loan to be two to three years and that I would make payments monthly. Of course, I had no problems qualifying for the personal loan because the bank already secured it to the $10,000. So even if I defaulted, the bank was protected.

I started paying the personal loan monthly, and after a while, I started submitting two payments per month, and eventually, I started paying weekly. The debt was paid off in 15 months. I used the same $10,000 I borrowed to make the monthly payments. I never touched the loan proceeds for anything else.

Once I paid off the personal loan, I asked for another one. Fast forward a few years later, and  I was able to get a $40,000 unsecured line of credit. This helped me get through those difficult times of COVID-19 when my law practice was at a standstill.

Of course, let me be clear: this cost me money. I’m paying the interest and sometimes the lender charges to approve the personal loan, usually called loan origination fees. Still, it was important for me to build up my credit again so I would be able to buy a home or a car in the future. And guess what? As of today, knock on wood, I have good credit.

The Credit Reporting System

I am critical of the credit score system because it never gives the whole picture, even though I just explained how to manipulate it; I mean, increase your credit score or take steps to rebuild your credit. Let me use a quick example to explain why the credit scoring system, while okay, is not perfect. This is another system that I employ.

Suppose you are applying for a car loan or a mortgage. In this case, you are buying a 300,000 dollar home, and the bank approves you for the total amount. You have $100,000 you can give as a deposit, which now means your home has $100,000 in equity, and your mortgage will be $200,000.

Don’t Give Away Points on Your Credit Score

Once that mortgage hits your credit report, the only thing the credit system knows is that you owe $200,000. And because you are making your mortgage payments and the principal on that $200,000 is being reduced slowly, your credit score will take a hit. Remember the credit utilization ratio!

While it might be a different formula for mortgages, the credit point system only knows that you still owe $199,000 on a $200,000 debt. It has no idea, nor does it factor in the $100,000 deposit or whether you even have $1 million in your bank account.

What I do is try to get the lender to approve me with a minimal down payment. Once the deal is closed and I sign on the dotted line (back when that actually existed), that debt will appear on my credit report within a month or two. Now, I use the deposit I had in hand to start making extra payments or more than a monthly payment to reduce that debt quickly.

For example, going back to the home example, if I had the full $300,000 mortgage and were willing to part with my initial $100,000, I would start doubling up on the payments, quickly reducing the principal on my loan.

What has changed in this scenario? If you think about it, I’m still using the $100,000 towards the home or, in this case, the mortgage, but the credit reporting bureau only sees that I am paying off the loan in a hurry. The alarm bells are now ringing again, but this time in a positive way, making my credit score explode.

I know this because my credit score was worse when I had multiple investment properties than my clients who had filed for bankruptcy because I had so many mortgages.

But now you know, after facing difficult times financially and having a credit score worth nothing, when I write about these blog posts, and soon podcasts and YouTube videos, understand that I am speaking not only from legal experience as an attorney, but also from a personal experience. I’ve been where you have been, which is why I love doing what I do. I enjoy helping others get through the same difficult times that I went through myself.

Have questions about your credit report or personal loan? Then, feel free to contact me so I can post your question in the Reader’s Question category.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon books. To access my YouTube channel, click this link.

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Please note the information on this site does not constitute legal advice and should be considered for informational purposes only.