Sticking to the long, slow credit rebuilding process

After bankruptcy, garnishment, find a plan that works for you

By  |  Published: January 21, 2017

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Question

Dear Credit Smart,
I am trying to repair my credit after my husband and I claimed bankruptcy, which was finalized in August 2007. After that we got a couple of credit cards and were trying to rebuild our credit when in 2010 my husband lost his job and I got my car repossessed, which put an even bigger dent in our credit.

I went back to school for better education and mainly got Pell grants to get me through. In 2014, we were in a position to start repairing our credit to get a better credit score so that in the future we can purchase our own home, something we have never done yet.

I started with a credit score of 520 and paid all delinquent accounts on my credit through a settlement agreement except for one card that took me to court and garnished my wages. The rest of the credit cards have high balances close to the credit line, which I know I need to pay down and I am trying to use the snowball method that I read about in a book. My mom thinks I should use the highest interest rate payoff method instead. What do you recommend? My credit score is now going up and down a few points hanging out around 560 and 575, so it has been a slow process to bring it up over the last couple of years. The goal is to get it in the 700s. Do you think this will ever be possible? My credit report has two public records on it: the bankruptcy and the court-ordered wage garnishment, which has been paid in full. – Julie

Answer

Dear Julie,
At this time of year, there are many people doing what you have been trying to do – figure out the best way to improve their credit scores and take care of their debt. I applaud your effort so far and encourage you to keep going. There is a light at the end of the tunnel, but it will take work, patience and perseverance to get there.

The snowball method you are using seems to be the preferred method for most consumers. When a consumer has many credit cards, the small victories gained as cards are paid off are great motivators to keep going. However, your mother does have a point if you have a card with a high balance whose rate is significantly higher than your other cards. You would be better off in the long run to target that card from a strictly dollars and cents point of view. My advice to you is to do what feels right for you. Whatever method you choose, be sure you can stick to it from this point forward and do not add to your credit card balances.

Since you say that all of your remaining cards are close to their limits, chances are you are not seeing the full effect of the snowball method yet. For my readers who do not know about this method, consumers must first decide the dollar amount they can afford each month toward their credit cards above the minimum payment required by the credit card company. Those credit cards with the smallest balances are targeted for paying off first with the extra amount decided upon. Once the first card is paid off, the amount the consumer puts out each month toward their debt will remain the same. The only difference is that the amount the consumer was paying toward the now paid-off card will be put toward the next card in addition to the minimum payment due. As that card is paid off, the same thing will happen to the next card in line. The amount you pay toward your debt will not change until your total debt is less than the total amount you have been paying during the entire process. At that point, all of your balances will be paid off.

Since your credit score is important to you for your future goals, I would also advise you not to close any cards that are still open. Closing the accounts will reduce your available credit and will negatively affect your score. When a card is paid off, use it for small monthly incidentals that you have the cash on hand to pay for and pay that card’s balance off in full each month. The payments you make to this card will not count in your debt payment as explained above. This money should be accounted for in your regular monthly household budget for whatever you use the card for, like gas or groceries. Using your card in this way will also help to improve your score.

It is far faster and easier to damage one’s credit score than it is to rebuild it. You are experiencing that now as you have seen your score go up and down. When you get to the point of paying one of these cards off and moving on to the next, you should start to see more positive movement. But it does take time. Your bankruptcy should be close to the point of falling off of your report, which will help some. But you are probably a ways off from making it to the 700s. To answer your question though, yes I do think it is possible for you to reach that goal if you continue on the path you have been on, using the aforementioned work, patience and perseverance.

Remember to always use your credit smarts!

See related: Repaying debt? Studies say forget math, go snowball

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Updated: 10-23-2017

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