In 2012, the American Bankruptcy Institute
reports that Americans filed 1,181,016 non-business bankruptcies. Even
though bankruptcies have dropped significantly from the previous three
years, many American families and individuals are still taking some
serious financial hits.
If you’re among the millions of Americans who have recently filed for bankruptcy, it’s never too early to start thinking about rebuilding your credit.
And even though a bankruptcy filing will stay on your credit report for
up to ten years, there’s much you can do in the meantime to begin
building your credit score back up.
Here are five ways to begin:
1. Look at the underlying causes
Unfortunately, one study from St. John’s University
found that about 16% of US bankruptcy filings were repeat filings, and
about 8% of bankruptcies were filed by those who had already filed one
or more times. That means that nearly one in ten people fail to fix the
underlying causes of their financial issues, so they stay on the
merry-go-round of bankruptcy for another ride.
Before you do
anything else to rebuild your credit, then, look at the underlying cause
of your bankruptcy. Did you speculate too much on a business venture by
taking on personal debt? Did you make one or two big-ticket purchases?
Or were you simply living consistently beyond your means? Maybe you were
just slightly overextending yourself in debt, and you lost a job, even.
Take
an honest look at the reason or reasons that you had to file for
bankruptcy, so that you can take steps to fix these issues in the
future.
2. Order your credit reports
Next, order
credit reports from all three credit reporting bureaus – Equifax,
Experian, and TransUnion. You’re entitled to one free report per bureau
per year, but it’s worth your while to pay for reports if you must. You
might also want to check your actual credit score (different from your credit report!), which usually costs around $5 extra per bureau.
First,
be sure that your credit reports include accurate information, both
personal information like your name and address and financial
information about your bankruptcy proceedings. Then, check the damage
that your bankruptcy did to your credit score. Once you know where
you’re starting from, you can dive in to improve your credit score.
3. Pay your bills on time
The single most important piece of your credit score
is how you pay your bills on time. Missing payments – which most people
do before they file for bankruptcy – can cause serious damage to your
report. Making payments on time, on the other hand, slowly but surely
builds your credit back up.
Do what you have to do to pay your
bills on time. That may mean automating payments so you don’t forget,
making extra payments once a month so you’re a bit ahead of the game, or
even getting a part-time job to ensure you don’t run out of money
before your bills are all paid. A careful personal or household budget
can also help you ensure you have enough money to go around, so that all
your bills are paid on time.
4. Start an emergency fund
One
reason that many people end up in bankruptcy is that they’re always
scrambling from one emergency to the next. So before you start taking
out new credit, build up a small emergency fund. Just $1,000 is a good
start, as this could be enough to fix a car or washing machine in a
pinch.
Having an emergency fund keeps you from going into more
debt when emergencies to arise – which they most certainly will! Just be
sure that you only touch this fund in a true emergency. Keep it
somewhere that’s hard to access – like a savings account not linked to a
checking account – to reduce temptation to spend emergency funds on
everyday items.
5. Apply for new credit, slowly and steadily
Finally,
know that you build credit by wisely using credit. Wise is a key word
there! If you go and rack up hundreds or thousands in credit card debt
very quickly, your credit score won’t improve. It might even drop, as
you’ll look even riskier to lenders.
Car loans and other secured
loans can be the easiest option to get, but make sure you aren’t going
to get fleeced with super-high rates. Otherwise, try taking out a secured credit card.
This kind of card is easier to get with a low credit score because you
pay a deposit before you can use the card. This ensures that the lender
will get some money back if you default on your payments, making you
more likely to get credit.
Taking these five steps will put you on
the right path to recovering your credit after bankruptcy. Just be sure
you learn to manage your money wisely, and you’ll go far in the future.
–from AFCPE Blog with guest blogger Abby Hayes