Do you have a felony and are struggling with rebuilding you credit after being released from prison? Improving your credit can be very challenging for any person, let alone if you have a criminal record.
Still, its very important to work towards this goal, even if it will take some time. Having a good credit score will help you get a job, rent an apartment, apply for a student loan or a credit card.
This guide will teach you smart hacks you can use to start rebuilding your credit and be on your way to a brighter financial future.
What is a good credit score?
A FICO credit score goes from 300 to 850. The lower your score, the more difficult it is for you to open new credit cards, get any kind of a loan or rent an apartment.
To determine your credit score, no more than 7 years of history are used. This means that if you had excellent credit history 10 years ago before you went to prison and then it dropped, no one will look at that. On the other hand, really bad credit that you had many years back will not negatively impact you today.
The credit score is made up of 5 different parts, that credit agencies evaluate when they compile your total. Understanding what makes up your credit score will serve as a road map to rebuilding your credit.
Here are the 5 key factors that make up your credit score:
1. Payment history (this one is most important and makes up a whopping 35% of the total score). Do you make your payments on time? This includes any kind of bill (phone, gas, water, etc), credit cards, loans, etc. If you are late on any payment even once, or fail to make it at all, this lowers your score.
2. How much you owe vs your credit line. (this factor makes up 30% of the score). High debt load compared to how much you have available to spend leads to a poor credit score. For example, if you have $1,000 credit line and own $900 on this card, your debt load is extremely high, and this drops the score. On the other hand, if you only owe $150 on this card, this is a very good debt to credit ratio.
3. Credit history length (makes up 15% of the score) The more seasoned your accounts the better. If you have a credit card that is 5 years old its much better than one that is 3 months or one year old.
4. How much new credit are you applying for (10% of the score). If you keep on applying for new loans or credit cards, it shows that you are struggling financially, and therefore you pose an increased risk to lenders. This lowers your total score.
5. What are your sources of credit? (10% of the score) Its best to have lots of different sources of credit, such as: credit card, student loan, auto loan, mortgage, etc. This shows that you are responsible and trustworthy to lend more money to. However, if you only have one or two sources of credit, this lowers your score.
Getting housing when you have poor credit
One of the biggest struggles for excons is finding a place to live after getting out of prison. Most landlords are very biased and they don’t want to rent out to someone with a criminal history. They are also afraid to take tenants who have very low credit scores, because there is a higher risk that they will not be able to pay rent on time.
Once you are able to show a decent credit score, you will have a lot more rental options open to you.
If you have no place to live while you are working on rebuilding your credit, you should apply for Section 8 housing. Eligibility depends on your income, NOT your credit score.
Other options include looking for basement apartments, shared rooms, temporary rentals and sublets. In the worst case scenario there are half-way houses and shelters that can offer temporary housing.
Check out our comprehensive guide on finding felon-friendly housing.
How does a felony affect your credit?
The good news is that having a felony or misdemeanor charges on your criminal record DOES NOT negatively impact your credit. Just because you served time in prison has no affect on your credit score.
However, there are indirect ways that your credit score may have been lowered during the time you were in prison:
– If you default on making payments (credit card, bills, rent, loans, etc) while in prison. Its estimated that over 80% of inmates stop paying their bills when they are in prison.
– If you shore up big debts on your existing credit cards while in prison or after getting out. This is a big challenge that many felons face: when you don’t have a source of income, credit cards are the only way to survive. However, having no money to make monthly payments basically ruins your credit.
– If you owe money to an individual and they file a civil claim in small claims court, this will be considered as a failure to pay off a loan and will lower your score.
– Opening or closing many cards at the same time will decrease your credit rating
– Having many past due payments from various bills that have gone to collection. Usually collection agencies don’t even know that someone is in prison.
How to rebuild bad credit
When you set your goal of rebuilding credit after getting out of prison, know that patience is a big key to success.
Your credit score will not miraculously climb into 600-700 range overnight. It may take up to one year or even longer to get your credit into a healthy range.
Keeping the 5 parts that make up your score, here is what you need to do:
1. Get financial counseling/advise
If you are still in prison and are getting released soon, its best to seek pre-release financial counseling programs. Many prisons across the US now offer this to the inmates to help them get started on rebuilding credit as early as possible.
2. Get your current credit score and credit report for free.
Apply for it at AnnualCreditReport.com. The credit report will outline in detail the problems that are causing your credit to be low: what you owe, to whom, etc.
If you find it hard or confusing to read the credit report, ask your parole officer for help. They may point you to local services that have volunteers who help felons with financial questions. Very often, local public libraries have volunteers that help people with questions about money, jobs, making a resume, etc.
3. Pay down the delinquent accounts.
This part can be overwhelming, because you may owe a lot of money of many different accounts. So this will be a long process before you can get everything paid off. The fastest way to improve your credit is to choose one or two small debts, and start making monthly payments to pay them off. Once this debt is gone, your credit score will improve greatly.
4. Get a secured credit card.
Many felons make the mistake of applying for multiple credit cards in hopes of rebuilding their credit. Of course, they usually get turned down, because an unsecured (standard) credit card requires at least a 600 credit score or more. However, even making these applications actually also hurts your credit!
Instead, save up some money and apply for one secured credit card. These cards are backed by a cash amount from the credit card holder himself. For example, if you save $300 you can get a card that will have a balance of $300.
Once you get this card, you can use it responsibly to make small purchases and then pay off the balance every month. Usually, if you carry a balance, you will incur a high interest rate on these cards, so its best to avoid it.
A secure credit cart is the first step to building good credit history.
5. Get a retail credit cart
After 5-6 months of making regular payments on your secure credit card, you want to try to apply for a retail or a gas credit card from a particular vendor. For example, TJMAxx, or Macy’s or Kohl’s offer their own credit cards. These are easier to get than a standard unsecured Visa or Master card from a big lender.
Once you get this card, you basically do the same thing. Spend a small amount each month and pay it off right away. Keep in mind that your goal is not to BUY nice things, but to just practice making payments on time and building credit.
6. Apply for an unsecured credit card
By this time you will be ready to apply for an unsecured card from Citi or Chase, or Discover and actually get it! Remember, don’t apply to 10 different cards all at once, this hurts your score. Your first card will likely have a very low credit line of just a few hundred dollars.
However, this is perfectly fine. Once the lender sees that you are making regular payments and that your debt to credit line ratio is low, you will be able to get a larger credit line.
Its very easy to get away with making impulsive purchases when you have a credit card. This is how many people get themselves into trouble in the first place. To avoid this pitfall, remember to spend only a small fraction of your credit line and pay it off every month. For example, if your credit line is $1,000, try not to spend more than $300-400 every month.
7. Manage your finances carefully
At this juncture in the road, you are basically working on two things:
– paying down your existing debts from collections
– making small purchases on your credit card/s and paying off your monthly balance
– save money for a down payment for a car. Getting a car loan is much easier if you have money to put down upfront
Doing this requires a lot of self-control and planning on where to spend the money that you are earning. If you are having a hard time with this, seek help from a family member who is better at handling money or a professional adviser.
It may also be a good idea to ask a family member to make you a co-signer on their credit card or personal loan. This will help you rebuild your credit faster. If they are worried about you misusing this card, they actually don’t have to give it to you. However, when they make regular payments on this account, it will help you as well.
This is only a good option if your relative is financially responsible and makes his/her payments on time!
8. Diversify your credit
Once some time has passed and you are successfully doing all of the above, its time to diversify your credit. Most people start by getting a car loan and buying a car. This is a huge goal for many felons, as having a car opens up a lot more job opportunities.
However, other options include getting a personal loan (there are very high interest rates on those, so you have to be careful) or a student loan, if you are interested in going back to school. Some people also apply for medical credit cards, if they need any kind of expensive medical or dental procedure done.
Having a portfolio of credit that you are regularly using and paying back will slowly but surely rebuild your credit history.
Your goal should be to have a credit score of at least 700 or higher. Everyone considers this to be very good credit, and it will allow you to have more and more financial freedom.
Please share your stories and tips on how you went about rebuilding your credit after getting out of prison in the comments below.