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March 28, 2011

Reestablishing Credit During the Recession

CreditCardsIStock.jpgA number of the people I counsel want to know how soon they can restore their credit after bankruptcy. The prerecession standard advice was two years for a credit card with decent interest and four years for a mortgage with indecent interest.

But that was then. Now, because so many people have bad credit because of foreclosures, late payments, and bankruptcies, it's hard to say what decisions the credit issuers will be making in the next several years. Will they be more forgiving because of the need to pull in people who might not have qualified a few years ago, or will they get tighter and not give credit at all until more time has elapsed after the bankruptcy? Only Fair Isaac (FICO) knows for sure, sort of.

For sure, if you want to reestablish credit, the old ways are probably still the best ways. Get a major credit card, periodically make purchases, scrupulously make your payments on time, get a second card, same thing, work to build your credit line, never max-out your cards, and so on. There are a number of other tips on the Fair Isaac website at that will help you lift your credit score to the maximum extent possible. The more you follow that advice, the better off you'll be. You can get Nolo's Credit Repair, by Robin Leonard and Margaret Reiter (Nolo) for even more on this subject. Or check out the free articles and FAQs in Nolo's Credit Repair for Bad Credit area of its website.

But should you even try to get your credit back? I often tell people I'm counseling that working to get your credit back is like an alcoholic learning how to drink better. Credit is simply the opportunity to go into debt, and once in debt it's really hard to get out. When you've received your bankruptcy discharge you will usually be completely solvent (except perhaps for debts like student loans and recent income taxes). Why spend energy for the privilege of going back into debt? There are lots of reasons why people feel it's a rational thing to do, but all you're really doing is preparing to live beyond your means.

Sure it's nice to have credit for an emergency, but people would be much better off reigning in their spending and saving as much and as fast as possible, and using their savings if necessary for an emergency. You may not feel like you're addicted to credit or spending (same thing), but chances are you are and are just in denial. Now I would never say this to your face because you would just deny it and be angry at me. Well, maybe you're still angry at me but at least I don't have to see it. Please accept the fact that my intentions are good -- to keep you solvent and out of debt.

December 18, 2008

New Credit Card Rules Will Protect Consumers... Eventually

After years of consumer complaints, congressional hearings, and newspaper accounts of unfair (but not illegal) practices by the credit card industry, federal regulators today (finally!) adopted new rules to protect consumers from such practices. Read about it here, here, and here.

Here are the highlights of what will be illegal as of June 1, 2010:

  1. No interest rate hikes on existing balances. Your interest rate is is locked in at the moment of purchase, and must remain so as long as you keep current on your payments (see below). Once you're 30 days late with a payment, you lose this protection. The interest rate on future purchases, of course, can be whatever rate the bank wants.
  2. No more "Universal Default". This is a biggie. This is where the credit card company raises your rate when you're late paying some other bill (for example, your car payment), and that late payment shows up in your credit report, so they raise your rate based on the so-called "universal default" clause. If your card does this, it can continue to do so for another year and a half and then no more, thanks to the rules passed today.
  3. More time required to pay between the statement date and the due date. In their quest to make payments late, some cards give you as little as 15 days from the statement date to the due date and then you're late. The new rules would require 21 days.
  4. No "Double Cycle" billing. Banks like to use your current and previous monthly balances in computing the finance charge. Under the new rule, banks can't count paid-off balances from prior months in assessing finance charges for the current month.
  5. Payments must be applied fairly. Banks can no longer apply your payments only to the lowest interest rate balances while higher rate balances, like those for cash advances, go unpaid.

All of this may seem like common sense and simple fairness. And it is. But remember, it won't be the law until July 1, 2010.

The litany of things listed here will still be legal until then... so, for banks it's woo hoo! pillage away! git while the gittin' is good and try to hijack the last of poor people's savings to cover the bank's own sorry balance sheets, the product of its own regrettable debt-fueled binges!

Fortunately, there are sites like that let you see which card companies already comply with these fairer practices.

The fact that these regulations are only now being put in place indicates the indifference that federal regulators have felt up to this point in protecting consumers. By giving billions to bankers, we know they care about them. Now they've thrown consumers a bone, too.

But we don't get it for another year and a half.

To learn more about new protections for credit cardholders, see Nolo's article New Credit Card Rules for 2010.