I was discharged from bankruptcy January 2015 and was able to get two credit cards to rebuild my credit but fell below again due to a hardship. I have two maxed out credit cards totaling at $900. I’m finally on my feet with a raise from my job as well and need a car loan of $19,000. If I pay the credit cards off, how soon can I apply for a car loan without them using the past maxed credit cards against me?
How soon can I apply for an auto loan after a bankruptcy discharge and a couple maxed out credit cards?
Glad you are back on your feet! Credit scores are recalculated every time they are pulled, and include your credit utilization ratio (how “maxed out” you are) at the moment the score is pulled as shown on your credit report. So as soon as those accounts show paid in full on your credit report (usually within 30 days or less, but you can check your report to be sure), any score pulled would reflect that improved credit utilization ratio.
Note that this is different than delinquencies. If you were 30 or more days late on those credit cards, those delinquencies will continue to show and affect your credit score for 7 years from the date of the late payment. While bringing them current and/or paying them off will prevent additional negatives from being added to the report, that will not erase the history of late payments which show for 7 years. Those delinquencies hurt your score, but hurt it less and less as they get less and less recent, until they drop off after 7 years.
However, you should also be aware that your bankruptcy is still fairly recent, and will have a much larger negative impact on your credit score than maxed out cards or even some delinquencies. It’s usually recommended that you wait at least 2 years from the date of discharge before attempting to obtain significant new credit, since it is during those first 24 months that the bankruptcy does the most damage to your credit.
If you choose to get the car loan now, be prepared that it will be more difficult to be approved, and you are likely to pay a much higher premium in the form of higher interest rates than you would if you could wait at least 2 years after your bankruptcy. And then you are stuck with that higher rate for a long time unless you manage to get it refinanced – most car loans are 5 or more years these days. Waiting even longer than 2 years is even is better – the older your bankruptcy is, the less it lowers your credit score, until it finally drops off your report in 10 years.
Use caution when incurring additional debt – be sure you are using your “fresh start” to avoid getting in debt trouble again. Remember, you cannot file bankruptcy again for anywhere from 2-8 years depending on what chapter you filed (7 or 13). You don’t want to get in a position where you need bankruptcy again – especially before you can legally claim it!
You never know when unfortunate circumstances could force you into financial difficulties again. You want to focus on using the opportunity provided by your bankruptcy discharge to manage your future finances as wisely as possible. Be sure you have an emergency fund – at least 3-6 months of living expenses-- saved up. Also make sure your debt-to-income ratio is reasonable – add your housing costs (rent or mortgage) PLUS all other debt payments and be sure to keep them less than 36-43% of your gross income.
If you go higher, you are putting yourself in an unsustainable position that can be very dangerous. If getting this car loan puts you above this ratio, you should seriously consider a less expensive, used vehicle or even saving up to pay cash for a very basic older car until you get in a better financial position to afford a more costly one.
Best wishes for your financial future!
~ Natalie Lohrenz, Certified Consumer Credit and Housing Counselor
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