Let’s begin with a major disclaimer: AOPA Aviation Finance is not a credit counseling company. If you have credit issues, there are many reputable credit counseling companies that exist, and we definitely recommend doing some research before choosing one. Know that there are plenty of scammers out there, so buyer beware.
Typically, people set out to build a credit history for one of two reasons: either they never had one, or they made a mess of it due to a major life event. It’s our experience that the young and the credit skeptical tend not to have an established credit history. Youth haven’t spent enough time in the workforce. Credit skeptics purposely avoid establishing a credit history because they don’t believe in debt.
Many life events can significantly damage one’s credit history. One of, if not the most common event, is divorce. Others include sudden loss of job or medical issues. These events frequently manifest as tax liens, short-sales, foreclosure, and bankruptcy. A major medical event can wreck an individual financially. Lenders are not unreasonable and can expect that bad things occasionally happen to good people. The most important thing they want to see is that the individual has worked diligently to re-establish a positive credit history through repayment of delinquent debts and demonstrated consistency since the event.
This is particularly relevant if you’ve declared bankruptcy, of which there are three types: Chapter 13, personal debt restructuring; Chapter 11, corporate debt restructuring; and Chapter 7, full dismissal of all debt obligations both corporate and personal. If you choose Chapter 7, expect lenders to have greater difficulty providing loans. They will need assurances not only through your credit behavior that indicate you are unlikely to go bankrupt again, but also an explanation of what happened to cause it and some comfort that it won’t happen again.
In that vein, be prepared to provide a written narrative with your loan application that explains the reason for the credit-damaging life event. What the lender is going to want to know are full details around why it happened. If you filed bankruptcy, was it 11, 13, or 7? Also when, or if it has yet been finalized. They'll want full disclosure of the various elements or circumstances that contributed to why you had financial troubles. Complete details are helpful in painting a complete picture.
One simple way to reestablish credit after an event is through the acquisition of a credit card. Putting a balance on it and paying it off on time each month is an excellent practice. Securing an auto loan is another method. We suggest financing half or less of the price of the car and pay it off earlier. That’s helpful in two ways. It makes the loan-to-value (LTV) attractive to the lender; and it keeps the monthly payment low, which keeps your debt-to-income (DTI) ratio low, too.
Reestablishing credit also means understanding and managing your credit reports. It’s not common knowledge, but bankruptcies drop off credit reports over time. According to Credit.com, Chapter 11 and Chapter 13 bankruptcies are supposed to be removed by the reporting agencies after seven years, Chapter 7 bankruptcy after ten. This matters because the removal of charge-offs generally provides an immediate credit score boost. If the bankruptcy still appears despite the passage of appropriate time, make every effort to get the credit reporting companies to delete it.
For those folks who say, “I just don’t believe in borrowing money. I think it’s a bad thing to do,” we understand not wanting to be overloaded with debt. However, at some point, you might want to finance an airplane purchase. Without a credit history, conventional financing is not an option.
The same advice applies. Get a credit card, sooner rather than later. Credit scores are partially predicated on one’s longest trade line, i.e. the longest credit relationship a person has. If the longest trade line an individual has is only a year or two, that will impact your credit score adversely. So even a lightly used-but-long-held credit card has great value from a trade line relationship perspective. There is a way to use debt responsibly and in a manner that helps preserve one’s liquidity and capital.
Great advice. Great rates. From helpful and responsive reps you can trust. Three good reasons to turn to AOPA Aviation Finance when you are buying an airplane. If you need a dependable source of financing with people who are on your side, just call 800.62.PLANE (800.627.5263) or click here to request a quote.
