Overcoming Bad Credit: My Personal Journey

Welcome to today’s blog post and podcast. Always an important subject: your credit score because options are limited with lousy credit.

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My Bad Credit Issues

I’ve had bad credit scores; that’s why, on this subject, it’s not so much my experience as a bankruptcy lawyer but my personal experiences. There are many stories I talk about when it comes to credit and foreclosures, but these are personal situations that I have dealt with. Of course, there are also issues my clients have faced and experiences I have gained with twenty-four years of practicing law. So, I have plenty of information I can always pass down to you. Learn from my mistakes and experiences so you can avoid them.

Today’s video focuses on dealing with bad credit and how I improved my creditworthiness with a personal loan. Unfortunately, my situation is one of those things that I have no control over. This is when you learn early in life that there are just some things you can’t control. And this is one of them.
I went from riding high to hitting rock bottom in a hurry. But that’s what I’m here to talk about, and it’s just my way of proving to you that you are not alone. Other people have gone through this and come out through the other side. There’s light at the end of the tunnel. They come out smiling.

From Excellent Credit to Terrible Credit

First, let’s talk about what happened. I was doing great. I had my home. I had a nice car. I had everything that I wanted. I even had a motorcycle I always dreamed of. Everything was perfect. But, sometimes, things beyond your control happen, and it started with Hurricanes Katrina and Wilma. A lot of you have lost homes due to hurricanes and tornadoes. If you’re in Florida, even more so, and Katrina and Wilman destroyed New Orleans.
However, the eye of both storms went over my home and caused substantial damage. So now I’m trying to get my insurance policy paid out to fix my roof, but the insurance company is not paying. So here’s my complaint about insurance companies.

Insurance companies are businesses that are there to make money. They’re not in the business of cutting checks. When it’s one home, they don’t care. They cut a check. But when we talk about tens of thousands of homes, they will try to avoid cutting that check no matter what. That is the God honest truth. That’s just the way life works.

If they start disbursing checks to everyone, they end up in bankruptcy, and they’re calling me, which is precisely what they are avoiding. For three years, I’ve been arguing with them. Finally, when I was close to filing a lawsuit, we settled. What’s the problem?

During that time, there was the bankruptcy law change in 2005, which resulted in half of my income or more disappearing overnight. It was June 1st when the law changed, and immediately, I lost income.
But, on top of that comes two hurricanes. It was an active hurricane season, destroying my home. All the fencing came down; the roof had multiple leaks. This was the straw that broke the camel’s back.

Now I’m in foreclosure, and the only reason is what happened in 2008: the mortgage foreclosure crisis. I’ve been fighting to get my homeowner’s insurance policy to fix the home for three years because the idea was to flip the home. There was no need for a large house. I could sell it, make some money, and downsize. I was one week away from selling my home and buying a townhouse in cash. I would be mortgage-free by my mid-thirties.

However, not only did my house suffer severe damage caused by the hurricane, but so did the townhouse I was buying. So, the deal is off for both properties. But by the time I settled with the insurance company, it was 2008, when the market crashed, and property values were cut 50 to 75% in some areas. In Naples, 100 miles West of Miami, the housing market was slashed to 70 to 80 percent. Now I’m thinking, do I want this home? And the answer is no.

I walked away, and the foreclosure process began. With that came terrible credit. If I wanted to borrow $20 from the bank, they would not give it to me, so I had to improve my credit.
While I was able to avoid filing for bankruptcy, after five years, I started rebuilding my credit because, in Florida, the statute limitations are between four to five years, but note that every state is different. I know some states go as high as seven years with the statute of limitations.

Rebuilding My Credit and Increasing My Credit Score

Now comes the rebuilding process. Of course, with bad credit, no bank will qualify me for a loan, but they will if I give the bank the money in advance, like a secured loan, similar to a car loan. The difference is that I’m giving them the loan amount in cash upfront.

In my case, I settled a personal injury case and set aside $10,000 that I used to open a savings account. No problems there. Of course, the bank was happy to assist me, but then I asked for a loan of $10,000. What do you think they said?

If I came to you at that time with my credit, would you loan me the money? Probably not. But what if I already gave you the money for the loan? If I default, you already have the money, plus now you’re collecting interest on top of the money you have, plus the loan interest.

I do have to warn you that you are paying interest. So make sure that the calculations make sense and that you can afford them. I didn’t have an income issue. I had terrible credit, but with a loan secured by cash, good credit, bad credit, or no credit, it won’t matter.

With a loan, the bank hopes you pay them back. This is different. They were already paid back. So, the loan was approved. The same technique can be used with credit cards.

Plenty of secured credit cards will help you slowly rebuild your credit. Now, clients always like to say that they can never get credit again because of bankruptcy. But that’s not true. Plenty of my clients have bought cars or homes two years after bankruptcy. It’s based on your credit, your deposit amount, income compared to expenses, and overall debt total.

You can have excellent credit, but if you have no proof of income, then the bank isn’t going to qualify you for a loan. You could have a high income, but if your expenses leave you with $0.00 left over at the end of the month, how can you pay back new debt? So it’s not just income, but also expenses.

Now that you know how secured credit works and the tactic I used, here’s a blog post on how my credit score went up 60 points.

• Using Personal Loans to Save Money and Boost Your Credit Score

The 30% Rule to Improve Your Credit Score

It’s no secret. It comes down to what I call the 30% rule. Now, what is the 30% rule? What is your line of credit? Say my credit card has a $1,000 credit line. What’s 30% of $1,000. It’s $300.00

Now, if you have three credit cards and each one has a $1,000 credit line, if you’re at 30% or $300 or less, your credit score will improve. That’s part of how credit reporting systems work. It’s not a perfect system, but I will tell you how to cheat to take advantage of the situation.

Here’s the simplest way. Let’s say I’m buying a car worth $10,000 and have the money to buy it in cash. If I do that, that doesn’t go to my credit. However, what if the bank says it will approve you for the loan with $5,000 down? All the credit bureaus know is that I have $5,000 more in debt. Next month, after your payment, your debt goes down a little. But your credit score will take a hit until you reach that magical 30%. I know, it doesn’t make sense. Why would your credit score decrease if you have good credit and make timely monthly payments? Because of the 30% rule.

So what is the trick? I’ll tell you my trick that immediately builds up my credit. Let’s use the exact figures. The bank approved me for the entire $10,000, but I have money for a deposit. The amount doesn’t matter. Say it’s $5,000, and they agree to no money down.

The next day, my credit score is taking a hit because I owe $10,000. That’s all the credit bureau knows. Now, if my payments are $100 a month and I start making payments of two to three hundred, my credit improves. The debt is being paid off faster.

Imagine if, instead of using the $5,000 as a deposit, I send a check for $1,000 each month. In five months, I cut the $10,000 loan in half. Two months later, I’m at thirty percent! In no time, your credit score will go through the roof. It’s that simple. I’ve done that with buying my car and home.

I always ask the lender to approve the loan with the least amount of money down and then start using my down payment to pay the loan faster. That’s how I got a sixty-point increase in one month.

• Does Filing for Bankruptcy Wipe Out Your Mortgage? The Confusion with Mortgages and Bankruptcy.

Now, think about those sixty points. Imagine the difference in interest if you’re applying for a car loan and have a 650 credit score. The average credit score is in that range. Now, from 650, you’re at 710. Imagine from 710 going to 770. The bank is throwing money at you. I’m not lying. It’s raining money because the bank knows you will pay back your debts. You’ll also get a lower interest rate, saving you money.

So, if you keep your debt balance at or below thirty percent, now you know what that will do to improve your credit.

More importantly, if you have the money and the bank accepts a lower deposit amount, pay down the debt faster with that down payment, and you will see how fast your credit score rises. The better your credit, the lower the interest rate, the more money you save. So try to have your debts under 30% of the credit line.

Now, if you’re going to buy a car in six months, you better start working to get under thirty percent as soon as possible. Please don’t do it the day before, especially since credit reporting usually works on a thirty-day cycle.
You’ll see your score climb if you can afford to do so six months before a loan. More importantly, you’re saving money.

Paying interest on $8,000 is not the same as paying interest on $3,000. So keep that in mind.
Now, while in my situation I was fortunate enough to have $10,000, it could be far less than that. You can get a secured credit card for $100 or $200, and little by little, you rebuild your credit.

If you have the money to give a substantial down payment, see if you can reduce the down payment. How low is the bank willing to go? Then, apply the remaining amount towards the debt and see your credit score rise.

In closing, if you have a question, please contact me. Today’s blog was from a reader asking about filing for Chapter 13 bankruptcy with a foreclosure sale two days away. She emailed me and had questions about the timing of filing for bankruptcy.

So, if you have any questions, email me at alex@bankruptcy.blog, and if your question is chosen, I’ll post a blog on your question. That way, we can all get a better understanding of the process, and so we can all take steps towards financial freedom,

For those of you who have my textbook, the paralegal and legal studies students, keep using the blog as a supplement to the textbook. Soon, I will be making a video to review every chapter of the textbook on filing for bankruptcy as that will help in your classes.

Feel free to follow me on Twitter, and you can also find me on Facebook. I’m even on LinkedIn.
Keep reaching out to me if you have any questions. It’s Friday. Have a good weekend. Relax, and let’s get back to business on Monday. Take care, everybody.

If you need to purchase my bankruptcy law textbook published by Routledge Publishing, the leader in academic publishing, you can buy it through all major book retailers, including Amazon. Consumer Bankruptcy Law: A Practical Guide for Students and Professionals.

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This audio transcript was edited for clarity.