Bankruptcy often comes even after you do all you can to manage your debt. It is a relief to be free from money worries that may have plagued your for years.
Insurance, car and home purchases, loans, and even jobs may depend on your credit score. It can be daunting to look ahead and wonder how you will recover. Declaring bankruptcy leaves a mark on your credit, it’s true, but the mark is not permanent. Even with the bankruptcy still on your credit report, you can rebuild your credit using these three simple habits.
Use Credit Cards (To Your Advantage)
It may seem counterintuitive to turn to credit cards, especially if they contributed to your debt in the first place. You will probably be tempted to stick with cash-only spending. However, debit and cash spending is not tracked by credit bureaus and therefore does not help build your credit score. Using credit cards correctly is one of the easiest ways to rebuild your credit.
There are several different types of credit cards. You may either want to stick to one kind to start, or use several, depending on your circumstances. The three main kinds you will want to look at are secured, unsecured, and retail or gas credit cards.
- A secured credit card functions essentially like a debit card: your credit limit is the same amount as the money you have available in the bank. The major difference is that your payments are reported to credit bureaus, rebuilding your credit score over time.
Considerations: If your bank does not report to all three credit bureaus (Experian, Equifax, and TransUnion), you will want to open your card through someone else. Also be on the lookout for steep upfront fees. You will probably want to keep your credit limit low—a good place to start is $500—and you don’t want your fee to eat up most of that credit. Many prepaid credit cards cost less than $50 to open, such as the Capital One Secured Card, BankAmericard Secured Card, and the Wells Fargo Secured Card.
- Unsecured credit cards are the credit cards you are likely more familiar with. Unsecured credit cards do not require collateral in the bank when you open them.
Considerations: The best way to build your credit on an unsecured card is to pay off your balance each month, and request a limit increase every year. So long as your spending remains regular, getting a bigger credit limit every year will improve your credit score by making the percentage you spend on the card lower and lower. However, it can be tempting to run up a balance on these cards, so you may be better off waiting before you jump back into this kind of credit.
- Retail and gas credit cards are operated through a store or gas station chain. These provide an excellent opportunity to show responsible spending habits.
Considerations: While retail and gas credit cards can have a huge positive impact on your credit score, it is important that you choose your card wisely. As with secured credit cards, avoid any cards with huge startup fees or cards that do not report to all three credit bureaus. You will also want to consider how much of a temptation the card poses. For example, taking out a credit card from a major department store may be a recipe for disaster if designer shoes are your Achilles’ heel.
Paying your bills on time every month is a simple enough recommendation, but you must keep your expenses manageable so that you are able to pay all of your bills in full and on time.
There are certain expenses that will be constant: housing, food, and utilities, for example. You should not use credit for household essentials. Allot the amount of money you will need for these expenses each month, then divide the remaining money between a savings account and rebuilding your credit by making non-essential purchases.
Budgeting is hard, but it doesn’t mean you can’t still enjoy entertainment or purchase gifts for family members. Buying these items builds your credit (just be sure you can pay them off).
There are hundreds of budget tools to choose from—find one that works for you and stick with it!
Be (Very) Vigilant
One of the biggest credit pitfalls is losing track of how and where you are spending money. Especially at first, you may be tempted to ignore the uglier aspects of your finances, but that will only hurt you in the long run.
There are many resources to help you track your spending, budget your money, and stay on top of your finances. Start by carefully reviewing your monthly statement as well as your credit reports. If you see anything unusual, even if it’s small, dispute it.
Many bankruptcy firms, such as Exelby & Partners Ltd, have online tools to help you track your finances. These tools include programs like debt calculators and simple credit tests to help you track your credit standing.
When you become an expert in your own finances, you will be better prepared to manage them properly.
Bankruptcy is not the end. You can have excellent credit again (or for the first time) by cultivating these three habits.