The number one concern of most people who are considering bankruptcy is the effect a bankruptcy will have on their credit. In some ways, this concern is merely a reflection of the consumer credit mentality that leads so many people to bankruptcy in the first place. The purpose of this article is to offer strategies for improving your credit and your credit use after bankruptcy.
1. You Must Alter Your Spending and Saving Habits.
In the days before credit cards, people saved money to cover events like broken pipes and leaky roofs. They anticipated large purchases, and they saved for those too. However, when credit cards became popular among the masses, we began to replace savings accounts with credit limits. Instead of money in the bank, we had a credit card with a $5,000 limit in case something came up. The problem with this mentality is that the first time you have to use that card to buy something you can not afford to buy with cash, you are behind, and many people never catch up.
If you have emerged from bankruptcy, you may be debt free for the first time in your adult life. The best thing you can do for yourself and your credit is to change your behavior right now. Make a budget, institute a savings plan, and learn to live without credit. Only when you have taught yourself how to save money will you be ready to handle credit responsibly.
2. Pay All of Your Remaining Debts On Time.
If you kept your car or your house, or if you had student loans that were not discharged, it is critically important that you pay all of these bills every month on time. Establishing a history of on time payments is critical to rebuilding your credit.
3. Do Not Take on Any New Debts or Credit.
Some people will tell you to go out immediately and get yourself a secured credit card, but I think this is a terrible idea. For at least 18 months after your bankruptcy, I believe you should focus on getting your financial house in order. Pay off your car and keep driving it. Enjoy the feeling of not having a car payment. See how much more money you have every month when you are not using all of it to pay for consumer goods you no longer even own. It is too easy to get back into trouble if you jump right back into the credit card game.
4. Save as Much Money As you Possibly Can.
For eighteen months, save every penny you can. Put the money in a bank account, buy a short term certificate of deposit, or put the money under your mattress. You need to re-wire your brain to think about expenses you know are coming and put aside money to cover them.
Having cash set aside somewhere is the best way to avoid problems with credit in the future. A healthy savings account will also lessen the effect of a spotty credit history by giving you a nice cushion for credit purchases it is difficult to avoid. Buying a house is a good example. If you try to get 100% financing for a house 2 years after a personal bankruptcy, no bank in the country is going to want to write you that loan. On the other hand, if you have a substantial down payment, you are showing the bank that you can be responsible with money and that you will also be invested in the house. You will have a much easier time getting the loan you need.
If you know you will need a new computer in twelve months, or you see that the tires on your car are looking worn, there is no reason in the world you need a credit card or a good credit rating to make those purchases. If you can learn to save money for these things instead, you will finally defeat your credit demons. Even if you feel like you are spending your savings just as quickly as you put them aside, you are still much better off than if you were using borrowed money to make the purchase.
5. After an Appropriate Time Begin to Selectively Apply for New Credit
Between 18 and 24 months after your Chapter 7 discharge, get a copy of your credit report and score. Take a look at where you were two years ago and where you are now. Chances are, your credit score has actually improved since the last time you checked it. You are no longer swimming in debt, and you should be building a good history of on time payments. Now you might feel like it is time to get another credit card.
At this point I would recommend that you get yourself a secured credit card. The only reason I recommend that you have a credit card at all is because you will need one if you ever have to rent a car. Car rental places do not like debit cards. Other than that, try to not to use the secured card.
If you feel like you need to use the card every month, try using it for only one monthly expense that you know you will be able to pay. Perhaps you can make it your gas card. Whatever you do, pay the credit card off in full every month. Nobody knows better than you what happens when you begin to carry a balance, so resolve that you will never do it again. If you find yourself unable to pay your credit card balance every month, put the card in a drawer and do not use it again for another 6 to 12 months. You are not yet ready to have a credit card again, but stick with the plan and you will be soon.
Remember that your credit score is just a reflection of your credit habits. Follow these simple steps, and you will see your credit score rise every month. Better still, you may find that your credit score is no longer as important to you as it once was because you have learned how not to live on credit.
Check out this related article, Finding Money to Pay Down Debt, or visit us on the web at Money-411 for more great tips on better living through smart debt and money management.
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