Rebuilding Credit After Bankruptcy
Here’s how to get your finances together, whether you’ve filed bankruptcy or you just need help stabilizing your money.
- Open a new checking and savings account. If you do not already have both a checking and a savings account, open one of each at a local bank or credit union. To choose a bank or credit union:
- Compare the interest rates and fees of all financial institutions between your residence and place of employment, or if you are unemployed, within ten (10) or fifteen (15) miles of your home.
- Consider the various services each bank provides, and the likelihood you will want or need each of them. A bank with many different services you will never use may not be the best choice for you.
- Talk to friends and family members about their banking institution; find out if they are happy with the interest rate, minimum deposit requirements, fees, and service they receive, and if they would recommend that you use the same institution.
- Get a secured credit card. Once you have a little money put away, you can put some of it toward a secured credit card. A secured card functions essentially like a debit card in that you pay the bank the money beforehand, but your payments should be reported to all three major credit bureaus and go toward pumping up your credit score.
- Start with around $500. As your credit improves, ask the bank if you can slowly start raising the limit.
- Be wary of anyone that asks you for outrageous start-up fees (some places try to charge up to $200) or for you to call a 1-900 number that will charge you money.
- Be sure to ask if your transactions will be reported to all three major credit bureaus. You want them to see that you’re paying off your debts so your score can begin to improve.
- Know that some banks might force you to wait for a year after you’ve filed bankruptcy to get a secured card. If that’s the case, focus on building up your savings in the meantime.
- Get a secured card at a bank you want to continue to use for awhile. You’ll eventually want to ask if you can switch to an unsecured card with the same bank, so choose wisely.
- Get a retail or gas credit card. When you’re back on track with a secured card, you can try applying for a retail or gas credit card. Keep these points in mind when you’re looking into it:
- Make sure your transactions will be reported to all three credit bureaus. Remember, the point of all this is for them to see you being responsible with your money.
- Avoid huge start-up fees.
- Try to get a card at a store where you won’t be tempted to go on a shopping spree. Gas cards are a good idea because gas is a necessary expense you won’t be tempted to splurge on. Try to avoid department stores that might tempt you with expensive items that are out of your price range.
- Pay off your balance every month. You might have heard that carrying a balance is great for your credit score, but that’s not necessarily true. Especially if you have bad credit, the credit bureaus want to see that you’re capable of paying off the balance as often as necessary. Only buy what you can afford at the end of the month.
- Get copies of your credit report from all three major bureaus. You can get one report a year from each bureau for free. Figure out where you are now, and where you’d like to be in two years. This can help you evaluate how drastically you need to restructure your finances. The three bureaus are:
- Equifax: 800-685-1111
- Experian: 888-397-3742
- TransUnion: 800-888-4213.
- Mark the date on your calendar when you can get another round of free credit reports next year. Consider that your appointment for checking your progress.
- Pay your bills on time. If you tend to be late paying your bills and incur late fees, now’s the time to stop. Draw up a calendar with all of your due dates (or enter it into your phone), and check it religiously. Make sure the money is ready ahead of time, and try to mail payments or do online transfers a day or two ahead of the deadline.
- Getting into the routine of paying your bills consistently can help you break some of the bad financial habits that contributed to your bankruptcy. Accept that it might be a difficult adjustment, but it’s what’s ultimately best for your bank account.
- Dispute incorrect information on your credit reports. Make sure you follow up with any reporting agency who lists incorrect information on your credit report or who continues to allow discharged debt to appear on the report. To dispute incorrect information on your credit report listed by the bureaus listed above, you can use the online dispute form on Equifax, the credit maintenance services page on Experian, and the dispute section under the personal services category on TransUnion.
- Budget for essentials. Sit down and figure out how much money you absolutely must spend every month. Try to be as strict as possible when it comes to differentiating between needs and wants––for instance, you might want unlimited texting but you don’t need it to live. Once you know how much money you need to live, you can start figuring out how to leverage the rest of it toward rebuilding your credit. Here’s a list of musts for most people:
- Housing/shelter. You probably have to pay rent or a mortgage every month. If what you’re paying currently is too high, you can look into more affordable housing.
- Food. Realistically estimate how much money you spend on food every month, including both groceries and dining out. If you need to cut that number down, consider eating at home and packing a lunch more often.
- Utilities. Water, trash, electricity and/or natural gas bills are usually unavoidable.
- Communications. You probably need access to a phone, whether it’s a land line or a cell phone. If your mobile bill is eating a big chunk of your money every week, see if you can downgrade to fewer minutes or a smaller data plan.
- Most people probably wouldn’t consider cable or internet access absolutely necessary to live. If you need to get online but you can no longer afford access at home, try using the WiFi at your local library or coffee shops.
- Transportation. Whether it’s a car, a bike, or a bus pass, you probably have to spend money to get around. If you have a car, figure out the monthly costs for gas, insurance, maintenance, and registration.
- Medical expenses. If you have a chronic condition that requires regular doctor visits or medication, be sure to note these costs. You could also include how much money insurance costs you every month.
- Use your remaining money to rebuild your credit. Whatever you have left over after you pay your living expenses can be used to rebuild your credit and purchase items that aren’t absolutely necessary (such as entertainment, gifts, etc.).
- Here’s the rationale: You shouldn’t ever be paying basic living expenses on credit. Using it to pay your rent or buy groceries is the path to revisiting disaster if you suddenly find yourself strapped for cash again. Gas is the only “necessity” that should ever be bought on credit during your rebuilding process, and then only using a gas card that’s reported to all three credit bureaus.
- Additionally, this keeps rebuilding your credit from becoming a matter of life and death. If it’s just something you’re doing on the side, after your basic living expenses are paid, you won’t feel so crestfallen if a bank or credit agency denies you.
- Build a small cushion in savings. Whenever you can, throw a bit of money toward a savings account reserved for minor emergencies. That way, if you suddenly have to drop $600 on urgent auto repairs or a medical event, you don’t need credit to do it.
- Start small. Most financial experts recommend having enough money in savings to cover 6 months of expenses, but that’s a little extreme for your current situation (though you can make that an eventual goal). For now, just put aside whatever you can spare and aim to get up to between $500 and $1000.
- Avoid finance companies. Remember, finance companies exist to make a profit. Instead of being swayed by debt consolidation offers, focus on maintaining your budget, putting money into savings, and slowly building up the limit on your secured card or retail card.
- Ask when you can upgrade to an unsecured card. If you’ve successfully managed a secured card for more than 12 months, consider asking your bank if you can switch over to an unsecured card. Most banks will agree to letting you have a low-limit unsecured card after 12 to 24 months.
- Keep the same mentality you had with the secured card. Avoid spending money you don’t have on the unsecured card so that you can keep yourself from sliding into bankruptcy again.
- Seek professional help. The National Foundation for Credit Counseling can offer free or low-cost help if you’re trying to rebuild your finances. Start here: http://www.nfcc.org/FirstStep/firststep_01.cfm.
- Don’t give in to shame. Fight the instinct to punish yourself for having bad credit, and instead focus simply on what you’re doing to improve. Remember, lots of people have walked this path before you. If they can make it, you can too.
- Try to do most of your business through one bank, through which you have a checking account, savings, and a credit card. Being a member in good standing with one bank can help you get access to better account perks later on.
- Track your spending with the help of an online banking app or website. Look for one that you can attach to your bank account and credit card, so you can see exactly where your money is going and budget accordingly.
- A large number of inquiries on your credit report can have a negative impact on your credit score. Therefore, you should not apply for every credit card or loan offer that arrives in your mail or inbox.
Sources and Citations