Bankruptcy means a fresh financial start for your family but discharging your debt is only the first step to repairing and building good credit.
Create and stick to a monthly budget.
In your post-bankruptcy life it is critical to live within your means. Otherwise, you may backslide into debt. Creating a monthly budget will help you examine your spending habits, prioritize and reduce expenses, and work toward rebuilding your credit.
The single rule in budgeting is that your income must cover your expenses. And you have just two options to change the outcome:
- Decrease your expenses.
- Increase your income.
First, calculate your total take-home (after taxes) income. If your pay varies week to week, average it over three months to come up with a monthly value. And if your income varies significantly by season, you will need to save more during your peak income to cover expenses incurred during you lower pay season.
Next, study your spending habits and categorize expenditures into essential expenses (housing and utilities, groceries, transportation to and from work, daycare, insurance, and any loans or debt payments) and non-essential expenses (eating out and entertainment, new clothes, vacations, gifts, and donations).
Tip: Sometimes banks or credit card companies provide an annual breakdown of your spending into several categories. This can speed up your budgeting process.
Now is the time to be ruthless in cutting expenses, especially non-essentials. End subscriptions like streaming services or cable, save take out or dining out for special occasions, and delay vacations until you’re on more secure financial footing. Essential expenditures are fair game for reductions, too. Consider a lower-cost vehicle, selling a vehicle, or moving to a less expensive home.
If you’ve cut your expenses and still come up short, you may need to increase your income. Look for a higher paying full-time position or add a part-time job or gig to your income stream.
Your goal should be that about 60 percent of your income goes toward essential expenses (if you can decrease that to 50 percent, even better!). From the remaining 40 percent, allocate 10 percent to savings, 10 percent to an emergency fund, 10 percent to retirement, and 10 percent to non-essentials.
Pay your bills on time.
Paying your bills on time is critical to rebuilding your credit. About 35 percent of your credit rating is based on your payment history.
Automate your bill paying as much as possible to limit your risk. Most banks offer free online bill pay, and most utilities and other vendors allow and encourage automated online payments.
You can often set your own payment date. This will not only help manage your cash flow, but by selecting a payment date a few days ahead of the due date you can mitigate any potential problems.
Monitor your credit report.
Initially, you’ll want to ensure that all the debut discharged as part of your bankruptcy is noted on your credit reports. Your best bet is to check all three major credit reporting bureaus: Equifax, Experian, and TransUnion.
Beyond this initial check, you should regularly monitor your credit report to ensure its accuracy and reflects your credit-building behaviors, like paying bills on time. You don’t need to check each credit reporting bureau monthly; one is typically sufficient.
Monitoring your credit report is a great way for you to track your progress in repairing your credit.
Tip: Many banks now have partnerships with one or more credit bureaus so you can monitor your credit score just as easily as checking your bank balance.
Don’t close old accounts.
While it might be tempting to close some of those old accounts, your credit score will take a hit if you decrease your total credit limit. So keep old accounts open, but maintain a zero balance on them.
Open a credit card and pay it off in full each month.
After bankruptcy, you need to rebuild your credit.
Use your new credit card wisely: make small purchases that you can know you can pay off in full each month. The idea is to build a positive credit history that shows you have restraint (you are not maxing out your card) and responsibility (you pay off the balance each month). And, about 30 percent of your credit rating is how much debt you’re carrying.
Tip: Sometimes it can be difficult to get approved for a “regular” (unsecured) credit card if you have bad credit. Consider applying for secured credit card instead. A secured credit card requires you deposit money into your account, that amount is your credit limit, and the credit card company will use the deposit to cover your debt should you not pay your bill.
Open a retail credit card.
After you’ve established a positive credit history with your secured credit card, consider opening a retail card. One aspect of your credit rating is the types of credit in use, so a retail card will show an improvement in your overall rating.
Just remember to make small purchases and pay it off in full each month.
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Call (914-946-2889) or email us at Francis J. Malara or Anne Penachio with any questions or for a free consultation.