People are often hesitant to file bankruptcy because they are concerned about how it will impact their ability to obtain credit in the future. But if you are in over your head with debt, bankruptcy can be a good way to start re-establishing your credit worthiness. However, after your bankruptcy, it's crucial to your financial recovery that you develop a solid plan that will lead you on a new financial path.
To learn what steps you can take to use credit responsibly and rebuild your credit after filing bankruptcy, read on.
Financial Planning Before the Bankruptcy Discharge
Before you receive a bankruptcy discharge, you will be required to take a financial management course which is a designed to help you better manage your money to prevent a financial hardship in the future. This is an ideal time to examine what led you to file bankruptcy. Some common reasons for filing bankruptcy, such as job loss, divorce, and unforeseen medical or legal problems, are unavoidable. But others, such as overspending and living beyond your means, can be avoided. By knowing your weaknesses, you work harder to avoid making these same mistakes in the future.
Financial Planning After the Bankruptcy Discharge
Although your bankruptcy will appear on your credit report for ten years, you can begin to rebuild your credit right away. Here are some steps you can take.
Establish A Realistic Monthly Budget
In your bankruptcy papers, you had to provide detailed information about your monthly expenses. This is a good starting point from which to track your monthly expenses. Be sure to include expenses for housing, utilities, food, transportation and other miscellaneous household expenses, as small as they may be (every penny counts). (For step-by-step instructions, see How to Make a Budget.)
Also, begin to put money away each week, even if only a few dollars, for an emergency fund. A good budget must not only plan for expected expenses, but also for the unexpected.
Avoid the impulse to overspend as this can derail you from your goal of getting on a better financial footing.
Open a Checking and Savings Account
If you do not already have a checking and savings account, now would be the ideal time to open one. Be sure to ask the bank about interest rates, minimum deposit requirements and other fees the bank may charge. Also inquire about other services the bank may offer, such as online bill pay features and then determine whether you will want or need them, especially if these add on services will incur a service fee.
(For tips on shopping for credit cards, and responsible credit card use, see our Banking & Credit Cards topic page.)
Monitor Your Credit Report
You are entitled to a free credit report each year and can obtain one by visiting www.annualreport.com. It is important to request and review your credit reports periodically to make sure that the information contained in the reports is accurate.
(For more on credit reports and credit scores, including how to improve them, visit our Credit Repair topic area.)
You can improve your credit report and credit score by:
Paying your bills on time. Paying your bills on time counts for about 35% of your credit rating. If you do not pay your bills on time and this information is reported to credit reporting agencies, you could see your credit rating drop significantly. This is the time that you want to show your creditors that you are creditworthy and responsible
Refraining from opening too many lines of credit. Having too much credit can negatively effect your income-to-debt ratio. By filing bankruptcy and discharging your debt, your debt-to-income ratio will be lower, which in turn, will help in increasing your credit score
Permitting too many creditor inquiries. Allowing too many prospective creditors to run your credit report can cause your credit score to go down. These inquiries will remain on your credit report for two years.
Not closing accounts that are in good standing. By closing an account that is in good standing, you are effectively cutting off that payment history which can negatively impact your credit score
Disputing inaccurate information of your credit report. Debts that were included in your bankruptcy should be reflected on your credit report. These debts should no longer be reported on your credit report as past due or charged off.
Get a Credit Card
Getting and responsibly using a credit card can be a good way to begin the process of rebuilding your credit. However, there are some important points that you should keep in mind:
- Read the fine print when you are applying for a credit card or line of credit. Inquire about the interest rate and other fees.
- Pay more than just the minimum payment owed each month.
- Don't allow your credit card balance to exceed 33% of the credit limit. Otherwise, you may negatively impact your debt-to-income ratio.
- Make your payments on time each month. Late payments can be devastating to your credit. To be sure that you do not miss a payment, set up your accounts to automatically debit from your checking or savings account each month, that way you can be assured that at least the minimum is being paid each month.
- Once you have established a pattern of paying your bill timely each month, contact the credit card company and renegotiate the interest rate being charged.
For more articles on rebuilding credit, visit our Credit Repair topic area.