Ten Ways To Rebuild Your Credit Score After Filing For Bankruptcy
You’ve made an important, and positive, step to regain you and your family’s financial future by taking charge of your situation and filing for bankruptcy. This is not a time for sorrow; instead, bankruptcy should be looked at in a positive way. After all, you now have the power to completely change your financial habits and start over.
You have, without a doubt, learned a lot about fiscal responsibility through your bankruptcy proceedings. By taking what you’ve learned, you can be on your procedure to higher credit scores and a clean credit report in only a matter of time.
1. Make a Budget – and Stick to It
We live in consumer society where possessions are status symbols. Having the nicest car, the biggest house and expensive clothes are nice, but where does that leave your finances? If you have to put those items on a credit card in order to pay for them, you cannot afford to buy them. Unfortunately, this is how many people end up on the path to financial hardship.
Instead, you should take a survey at your income each month and make a budget that allows you to pay your bills while and save money while giving you the ability to have some fun. As a general rule, you should start by budgeting for the most important expenses.
First of all, you should take a clear percentage of your monthly income and put it into savings. The amount you should save should be at least 1-2% of your take home income; but ideally it should be at least 10%. That way you won’t have to set emergency expenses on your credit card.
Second, budget for your monthly rent or mortgage payment. Your rent or mortgage payment should not be more than 30% of your monthly income. If you’re payment is more than that, consider downsizing to a home with a smaller monthly payment.
Third, budget for groceries. Consider your family’s size and average monthly food expenditures and work that into your monthly budget. Next come utilities and other bills. Finally, work in any miscellaneous expenses that you have each month.
This is an example of a budget you can set up for you and your family. Take note that this can be adapted to your current situation; the most famous thing is that you are taking care of financial responsibilities while leaving room for the fun things in life!
Expense
Monthly Income $3000
Rent
$800
Groceries
$500
Electricity
$200
Gas
$200
Transportation (Gas/Public Transportation)
$200
Credit Card/Loan Payments
$450
Savings
$350
Miscellaneous (Entertainment, Clothing)
$300
Another thing to think about when making a monthly budget is for ways to save money whenever possible. It’s a good idea to start clipping coupons to build on your grocery bill and to cook at home more rather than eating out all of the time. These runt penny-pinching techniques can save a lot of money over the course of a month – money that you can save or use to pay off bills.
2. Learn to Pay Yourself First
Paying yourself first each month is a great step to building a better financial life. By routinely taking out money each month, you’re decreasing your risk of falling into the cycle of debt. Instead, you’re building a fund that can be kept to pay for unexpected expenses as they arise. Think about it: how nice would it be to have the money to pay for car repairs in cash rather than putting them on a credit card? Radiant good opinion, right? That’s why it’s so important to have an emergency fund of savings at your disposal.
You may be wondering how much money you should set aside each month to achieve into savings. The general rule of thumb should be to place as distinguished money as you can comfortably afford. If you can afford to state aside 15% of your paycheck each month, do it! If not, think about saving at least 1-2% of your pay. The most important part is to effect something.
Once you build up that nest egg, leave it alone! Don’t tap into it unless it’s absolutely essential. Car repairs or medical expenses are essential expenses; a sale on Coach purses is not.
3. Open a Checking and Savings Account
If you don’t already have a checking and savings chronicle, prefer the time to head to your local bank and open one. Having a checking and savings account, and using them responsibly, is an valuable step on your road to credit recovery.
There are many benefits to having a checking account. Most banks offer free checking accounts, and some even offer interest on their accounts. So, you could be essentially earning money for putting your money into the narrative. In addition, many banks allow you to direct deposit your paychecks into your account, saving you a trip to the bank to deposit your check. Plus, funds that are directly deposited in your fable are available right away. Paper checks are generally held for several days until the funds clear. This hold-up on your money can cause you to get behind on your bill paying schedule and hamper your efforts to pay your bills on time.
Another relatively-recent innovation to checking accounts is bill pay. Banks usually offer their checking account customers the option to have bill pay on their accounts. This is a wonderful option because the bill pay allows you to set up the bills you need to be paid and then your bank automatically sends them a check on the date you specify. What does that mean for you? It means you don’t have to expend the time writing out checks and mailing them – it’s all done for you. Also, because you set them up to go out on a certain date, you don’t have to worry about forgetting to send a bill. This is an excellent way to ensure that you’re paying your bills on time!
A savings epic is another must-have. We discussed the importance of saving money each month for the future and for emergency expenses. You’ll need a dwelling to put that money. A savings story will generally earn you interest, so you’ll make a shrimp bit of money while saving your money. Many banks will also let you set up your accounts so that a set amount is transferred from your checking to your savings sage each month. This is a no-hassle way to ensure you’re saving money because you don’t have to remember to do it.
Outside of the personal benefits, having a checking and savings account is an important step in credit repair because lenders will want to see that you have a place to keep your money. It’ll also explain that you have money in the bank to repay them with – an necessary thing for lenders to know!
4. Get a Free Copy of Your Credit Report and Examine Closely
Now that you have your financial house in order, it’s time to start thinking about the actual mechanics of credit repair. To start, you should accumulate a free copy of your credit report from the vast three credit reporting agencies (TransUnion, Experian and Equifax.) You should also engage your FICO score from The Radiant Isaac Corporation. What is a FICO score? It’s a number that takes into account several different credit factors that give lenders an idea of your credit worthiness. Your FICO accept will fall somewhere in the range of 300-850. As you may have guessed, the higher your credit score is on the range of scores, the better. Most lenders prefer that you have credit scores above 700. You’ll have to purchase it because while the reporting agencies are required to give you an annual credit report for free, they aren’t required to give your FICO gather for free.
Next, you need to go over your credit report with a fine-toothed comb and ensure that all of the information on there is accurate. It’s not uncommon for pre-bankruptcy debts to be listed on a credit report after a bankruptcy is discharged. However, these accounts should be removed as soon as possible. To pick up them removed, you must write a letter to the credit reporting agencies with your bankruptcy papers asking them to be removed immediately. If you’re not sure what to put in your letter to the credit agencies, ask for legal advice.
In addition to inaccurate account listings, you’ll want to acquire sure your personal information is listed correctly. If your name is misspelled or address information is wrong, you’ll want to dispute that with the credit reporting agencies to make sure your credit reports are as right as possible. You don’t want any misinformation on your report while you’re trying to rebuild your credit post-bankruptcy.
5. Get a Secured Credit Card
One of the keys to rebuilding credit is to show a history of responsibly using credit. One of the best ways to do this post-bankruptcy is to open a secured credit card and exercise it to make small purchases that you pay off each month.
How does a secured credit card work? You make a cash deposit, usually anywhere between $200-500. This is the “secured” part of the credit card. The amount you pay in deposit is the line of credit on the card. You’ll be able to charge purchases to the credit card and then you’ll receive a bill at the demolish of the month for those purchases, honest like a regular credit card. The only disagreement is that if you default on the payment, the lender that issued the secured credit card will keep your deposit to offset your non-payment.
You also shouldn’t grab just any secured card. Look for the following:
• A secured credit card with no application fee and a reasonable annual fee. You don’t have to pay immense fees to help rebuild your credit; there are plenty of secured credit cards on the market that charge affordable fees.
• A secured credit card that reports to the three credit reporting agencies each month. You’re defeating the purpose of a secured credit card if it doesn’t report. Originate sure that you ask before you apply.
• A secured credit card that converts to an unsecured card after 12-24 months of on-time payments. A benefit of these credit cards is that many lenders will reward you for good payment behavior.
$200-500 on a secured credit card might not seem like considerable, but it’s a start. You’ll want to remember that a secured credit card is reported to the credit reporting agencies like a regular credit card. However, it can be a catch-22: max out your secured credit card on a regular basis and you’ll damage your credit score even more. A FICO score takes into account several different factors, including the ratio of your debt to available credit. Max out your secured credit card on a regular basis and it’ll characterize that you are overextending yourself. Avoid this by making itsy-bitsy purchases and paying them off right away. For instance, construct a gas purchase and then send in the payment immediately afterward. Doing this will get you in the habit of paying off your credit card balances in full each month, a habit that saves you money and stress.
6. Take Out an Installment Loan
Another key to rebuilding credit is to explain consistent payment of a set amount each month. This also helps to build a positive payment history that has a direct impact on your credit score. If you have student loans that weren’t discharged in your bankruptcy, continue to pay them regularly and on time each month. This especially helps your credit because paying down debt helps your credit score just as much as a obvious payment history does.
If you don’t have student loans, consider taking out an auto loan to accept the benefits of an installment loan on your credit report. However, you need to be prepared to pay an incredibly high interest rate. It’s not uncommon for people just out of bankruptcy to pay as considerable as 22% on an auto loan. However, after some time has passed, and you’re able to improve your credit, you can refinance your auto loan for considerably lower rates that will save you money.
7. Piggyback on Someone Else’s Good Credit
Piggybacking is a little-known and underutilized credit technique that can improve your credit score. What does piggybacking mean? It’s basically means that you are added as an authorized user to someone else’s credit and revolving accounts. In return, the information is reported on your credit reports, including the amount of credit available and the payment history. How does this help your credit report? Because it adds a positive credit account to your credit report and the clear payment history and amount of credit available is weighed into the formula that determines your FICO credit score.
Seems too good to be lawful, right? It’s not. However, before pursuing this, you should know the credit history of the person you’re asking. The process can instantly increase your credit bag, but it can also decrease it as well if the person has bad credit.
In addition, it’s important to note that not all credit card issuers allow you to import the card user’s account history so you should check to see if they allow you to be an authorized user (what you need to be in order to piggyback and increase your credit) or a simply a joint user. The introduction of the new FICO 08 credit scoring model that was introduced in February 2009 requires they only people that can benefit from piggybacking are spouses and children.
8. Keep Your Debt-to-Income Ratios Low
As mentioned before, your FICO score is measured with a formula that takes several different factors into account. One of these factors is your overall debt-to-income ratio. But, what is this exactly?
Your debt-to-income ratio, or DTI, is your debt load versus the amount of income you bring in each month. The higher your DTI, the bigger the hit your FICO acquire will assume. So, to improve your credit net, you’d want to keep your DTI as low as possible.
You’re probably wondering what that magical percentage is that will help you improve your credit. Naturally, the lower the percentage, the better affect it will have on your credit score. Ideally, you want your DTI to be no more than 33% at the most. This means that for every $100 you make, the most that should go toward paying your debt should be $33. That’s still a lot of money. That’s why it’s important to preserve your debt load as obscene as possible.
9. Safeguard Yourself From Late Payments
A titanic part of your FICO credit score is weighed on your payment history. That’s why it’s so important to build a positive payment history while rebuilding your credit after a bankruptcy. After all, what’s the point of doing all the work of opening a secured credit card and obtaining an installment loan if you’re not going to beget on-time payments.
That’s why you need to set yourself up on some sort of schedule to ensure that you are paying your bills on time, every time. As mentioned earlier, many checking accounts now offer bill pay that allow you to set your bills up to be paid on a recurring schedule each month. You just build sure there’s money in the account and your bank takes care of the rest.
If bank bill pay isn’t your thing, then develop your own system and stick to it. Maybe have a certain day you sit down each week to pay all of your bills for the upcoming week. Or, maybe you like Excel spreadsheets and manufacture a chart of your payments and when they are due. Just create sure you give yourself enough padding before the due date: the mail can be unpredictable. You don’t want to take a hit on your credit report, and pay a hefty slack fee because of the Post Office.
In addition, paying your bills on time, even to utilities and the cable company, is important for lenders to see, even outside your FICO score. A positive effort after a bankruptcy can elicit goodwill from lenders who behold that you are making an earnest effort to improve your credit, even when your current FICO gather does not reflect that.
10. Monitor Your Progress
Anything worth doing is worth waiting for. This is especially true for credit repair after a bankruptcy. Unfortunately, the road to a high credit score won’t happen overnight. That’s why it’s very, very well-known to take a step back and monitor your progress every few months.
How can you monitor your progress? By doing a few things, including:
• Looking over your credit reports and FICO score. The best way to chart your progress is to eye at your credit information to see how much it has improved over time. You’ll be motivated to continue on your path to financial freedom because you see the direct result of your efforts: a high credit net and clean credit describe. Checking over your reports every few months will also let you definite up any inaccurate information that may have popped up that can affect your credit scores negatively.
• Checking your savings accounts. How are you doing with the emergency fund? Are you finding yourself saving more, or are you dipping into that fund too much. If it’s the latter, you may want to reevaluate your budget and make changes before it becomes a bigger problem.
• Check you payment history. Are you making payments on time, every time? If not, why not? Your credit score is weighed heavily on your payment history, so produce sure you remedy this situation promptly. Again, if you find it’s because you’re running out of money each month, you need to execute changes to ensure that this isn’t happening any more.
• Explore at your credit card usage. Are you paying your balances off each month? You should be. If not, again reevaluate your budget and financial picture to ensure that this is happening.
• Be sure to treat yourself. Sure, rebuilding your credit after a bankruptcy is about discipline and budgeting, but it’s also about making it fun so it becomes a lifelong commitment. That’s why you should treat yourself to a nice dinner out, or a new outfit, every once in awhile to keep yourself on track. Have you heard the saying that the forbidden fruit is always the sweetest? Well, deny yourself any of life’s simple pleasures long enough and chances are that you’ll find yourself on a slippery slope back to your financial past.
Declaring bankruptcy isn’t the end of the world: it’s the start of a new life – one without debt and the stresses that it brings. Take this positive opportunity to open fresh and assign agreeable financial habits and you’ll be on your way to high credit scores and a clean credit report before you know it – likely great faster than the 7-10 years that your bankruptcy will remain on your credit report.
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Filed under Sole Proprietorship Bankruptcy by on Nov 15th, 2011. 
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