There is no overnight solution to rebuilding your credit after bankruptcy. It is a process that requires patience and confidence in your financial habits. You can rebuild your credit safely and avoid the dangers that come from accruing too much debt too quickly.
Have a realistic budget
Opening new lines of credit will help you rebuild your credit score. However, before you consider taking out a new loan or applying for a credit card, you should have a clear understanding and a sound approach to handling your current monthly expenses. Create a budget that includes all of your monthly costs and leaves some cushion for an emergency fund. This will help you determine if you can repay the loan you are applying for or afford the new expenses you are charging on your credit card.
Don’t be frightened of more interest
After coming out of the bankruptcy process, you will have minimal or zero debt, which will be a huge relief for you as a borrower. However, lenders will know that you have gone through bankruptcy, but this doesn’t necessarily mean they won’t lend to you. In fact, this is an opportunity for lenders to earn extra money, as they will likely tack on additional interest to your loan. Don’t be discouraged by this. Since you have no existing debt, you can budget your finances accordingly to pay back the additional interest while making timely monthly payments.
Use a credit card wisely
The only way to build up good credit is to pay off monthly balances on time. After going through a bankruptcy, you might think that banks will be hesitant to give you a credit card, but that is not the case. Credit card companies will see you as a blank slate, and while they will also likely apply higher interest rates to your credit cards, using the card and paying it off every month is advantageous to your financial standing. This will demonstrate to the lending world that you are active in your spending habits as well as in your monthly payments. Consider using your card for regular items you routinely budget, such as gas or groceries. Don’t go overboard – keep your monthly credit purchases simple and small to demonstrate your ability to pay it off.
Using a secured credit card is an excellent idea because it will help you limit your use. The way a secured card works is you provide a deposit to establish your limit. For instance, if you give the bank a deposit of $500, that becomes your credit limit. This ensures you never go over how much you have. As your bank account and confidence grows, you can up our limit over time.
Only borrow or spend what you can pay off
When applying for a new loan or using your new credit card, limit yourself to realistic expenses that you know you can afford each month. You want to rebuild your credit with small steps, rather than large leaps. Keep your loans and credit purchases small, knowing that your monthly statements will include higher interest. This is another reason to apply for a secured credit card: it is structured to ensure you only spend what you have.
Set up automatic payments
While having money in your checking account is a satisfying feeling, having zero debt can be even more gratifying. You should set up automatic payments so that every paycheck you receive, your debts are automatically repaid. This will make budgeting easier as your monthly obligations will be taken care of before you even see a dollar. This will help you be more responsible with the money in your account, and keep you moving in the right direction financially.
The most important step to rebuilding your credit is to have confidence in yourself. There are many people who assume that establishing solid credit after bankruptcy is impossible, but this is utterly false. Rebuilding your credit is not an easy task, but if you are realistic in your approach, you won’t have any trouble. Bankruptcy has freed you from your previous financial hardships and wiped your slate clean: Take advantage of your fresh start and rebuild your credit with confidence.