She was beautiful.
One look and that's all she wrote.
I wanted her and nothing was going to stop me.
I was determined.
Her body glistened in the sun. Her looks could kill.
She was every young man's dream...
Of course I'm referring to the used, red, Mazda Miata I tried so desperately to finance shortly after my bankruptcy.
She captured my heart...and that was the problem. Common sense went out the window and I began making choices based on wants rather than needs.
It didn't matter who financed that car for me or at what interest rate—I just wanted it.
That's the same type of thinking that led me to file bankruptcy.
MISTAKE #1: Allowing emotions to influence your decision-making
People tell me all the time that they filed bankruptcy to save their homes. Homes that they...
...have three mortgages on
...have no equity in
...owe more on than the appraised value
(this is called negative equity)
...are too emotionally invested in
What the @#?! Geez Louise.
Allowing emotions to creep into your credit or financial decisions is dangerous at best.
When my wife and I and I bought our first home after bankruptcy it wasn't our dream home. We looked at it as an investment. Before every spending decision we made with that home we asked the question: “Will this increase the resale value of the home?”
Same thing when we purchased our first commercial building. Every decision was based on whether it would increase the value of the building.
It's easy to get caught up in the emotion of the moment and start doing things to (and spending money on) a house or car to make it special just for you.
And you should make your house a home...within reason. My best advice: only put money into a property you own, and only in things that make the home appreciate.
For example...
Instead of adding a swimming pool...Add landscaping around your home
Instead of adding a storage shed in the back yard...Paint the interior walls a neutral color
Instead of purchasing expensive furniture...Install new carpet or hardwood floors
Your Realtor or real estate appraiser can offer advice on where it's best to invest money in your home to increase its value.
And for you renters...putting money into the home you're renting helps the owner more than it helps you.
Negotiate a deal that will benefit you before you do anything to improve a home that you do not own.
You get the idea.
Same goes for your car...
It's just plain silly how kids these days spend money on fancy rims or high-end stereos and speakers for their cars—please tell me your car doesn't look like this.
My brother did this to his first truck—a Mazda B2000 pickup truck. He installed a custom stereo system complete with walnut trim.
It looked ugly...really ugly.
I teased him about it so much that he finally removed the stereo.
Generally, a car is a terrible investment because it's a depreciating asset. That's one reason why I lease most of my cars. But, we all have to get around don't we? And we'd like to get around in style. But, I guarantee you that having expensive rims on your car won't do a thing for its value.
Spend your money on assets that increase in value. It's a principle that separates the middle-class from the rich.
MISTAKE #2: Believing everything you hear
Be skeptical of the credit advice every car dealer, mortgage broker, banker, well-meaning friend or family member, or credit union employee gives you—they're usually wrong.
Unless the person you're talking to filed bankruptcy or has a long history of helping bankrupt people—take what they say with a grain of salt.
Always, always, always get a second, third, fourth, fifth, sixth, and even a seventh opinion. Don't stop until you find what you want...or simply keep on reading Life After Bankruptcy. A quick glance through the back issues should give you most of the answers you need.
A lot of lenders are going to say, “No,” to you when you apply for a loan. They're going to tell you can't get a loan or you can only get financing from a finance company at an outrageously high interest rate.
Don't listen to them!
Just because a person tells you NO—doesn't mean the correct answer is NO. It simply means you should go to another lender.
You must be diligent.
You must have hope...not be hopeless.
NO must mean absolutely nothing to you.
When a lender told me, “No,” I just went to the next lender.
MISTAKE #3: Shopping for credit the wrong way
Did you know lenders don't need your signature or Social Security number to review your credit reports and credit scores?
It's true!
Just stepping on a car lot gives the dealer “permissible purpose” to review your credit.
If you allow them to make a copy of your driver's license, you've just given them all of the information they need to pull your credit reports. Don't believe the myth that your Social Security number is required to pull your reports...it isn't. The car dealer can review your credit reports using only your name and address, and that could lower your FICO credit scores.
Fortunately, most lenders don't practice this. But some do.
As you should know by now, almost every time a lender reviews your credit, they post a credit inquiry on your credit reports. And credit inquiries can lower your credit scores. I talked all about it in Life After Bankruptcy Issue #15.
So how do you control the situation?
First, you make it very clear to every lender you speak to that you do not want them to review your credit reports until you've made a final decision to work with them.
You do this by giving them NO information about yourself. This means no credit application...no Social Security number...and no driver's license.
After you've interviewed several lenders and have found one that you're comfortable working with, give your information to only that lender.
MISTAKE #4: Not creating a written game plan
You need to put your game plan in writing. But don't make this more complicated than it needs to be. Your plan can be as simple as:
1. Get a secured Visa card
2. Get a secured MasterCard
3. Raise my FICO credit scores to over 600
4. Finance a new car
5. Obtain a secured bank loan
6. Get approved for a gas card
7. Raise my FICO credit scores to over 640
8. Mortgage a new home
9. Raise my FICO credit scores to over 700
10. Get a home equity loan
11. Pay off all my revolving debt
12. Purchase my first investment property
However, goals without deadlines are just wishes. A much better game plan includes specific dates and may look like this...
Once you have your game plan in writing, you should make a “goals folder” and place a copy of your game plan in it for future reference. Put another copy where you can see it every day, then visualize how to obtain each goal.
MISTAKE #5: Delaying your re-entry into the credit world
Some people need a cooling off period after filing bankruptcy...a time when you live on a cash-only basis. No credit. No credit cards. No checking account. Nothing. Michele and I did this.
How do you know if you need a cooling off period? Ask yourself, “When was the last time I saw a loan as the solution to getting out of debt?”
A better question would be, “How can I increase my income to accomplish my goal of getting out of debt?”
My wife and I chose to pay cash for everything from the time we filed bankruptcy up until we received our discharge papers in the mail.
We didn't have to pay cash until we were discharged...we chose to because of what the discipline would teach us. Then we mailed our secured credit card application the very same day we received our discharge papers.
I'm not kidding.
We had the application and cashier's check ready—we were just waiting for the discharge letter.
You see, we took time and made the effort to create a written game plan, and then simply followed the plan.
Most people plan their vacations better than they do their financial lives. Don't let this be you.
The longer you delay getting back into the credit world—the longer your credit scores will suffer.
Even if you don't use your credit cards that much—it's better to get them as soon as possible.
Why?
One of the key characteristics that makes up your FICO credit scores is how long you've had established credit accounts. So the longer you have credit accounts—the better your scores.
These are just five of the most common mistakes bankrupt people make on a regular basis. There are many more.
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