The most common question I hear from clients during and after a bankruptcy filing, is “How can I improve my credit score?”
While credit repair is not my are of expertise, and I cannot predict how many points your credit will be affected by any given method, I have learned a few tricks over the years, and have seen them work, too.
Also, having good credit begins with financial health and responsibility. And on that topic, I am a bit of a guru. So here are a few things I have learned over the years.
Don’t Avoid Credit Cards, But Don’t Abuse Them Either
Using credit responsibly may help to improve your credit score over time. However, be careful not to let debt accumulate, or you will quickly find yourself in trouble.
First, compare offers from various different credit card companies. Then, choose a credit card with the lowest interest rate and little or no annual/monthly fee. Next, use credit cards only for small, regular purchases (like gas or groceries) that you would otherwise pay cash for. Now, the most important part… keep that cash handy and pay off the entire balance at the end of the month, on or before the due date. Repeat this every month and you are now a responsible credit card user and will appear to be a much better credit risk to lenders.
Rely on Savings for All Things Unexpected
Life happens. The car breaks down, you suffer an unexpected illness or injury, or lose your job… the list can go on and on. But, if you’re prepared for these events, you can avoid burying yourself in debt.
If you put some money aside from every paycheck, you’ll have a stash of cash to turn to when times get tough. Using your own money means you don’t have pay credit card interest.
Saving is easier then you think. First, select an amount from every paycheck that you can save (even if it’s only $25). Next, leave it there! That’s right. Don’t use it, except for in the most dire of emergencies. Over time, your savings will grow, and if you put it in the right account, the bank will pay you interest. The more you save, the more interest you’ll earn.
And, if you link a savings account to your checking account, you can usually use savings instead of overdraft protection, which we all know is costly ($25-$35 for each overdraft).
But if you’re having trouble saving or you’re over-drafting often, you may want to revisit your budget (see below).
Cask is King
Believe it or not, using cash can save you money! A swipe-swipe here, and a swipe-swipe there, and your money is flying out the window.
We tend to be very disconnected from our spending when we use debit cards for day-to-day purchases, because most of these purchases are relatively small, but add up more quickly than our brains would like to let us admit.
That’s why you’re often shocked when checking your account balance and notice there’s a lot less in the account than you expected. A few dollars at Starbucks, a few more dollars at the QuickCheck, a few more little swipes here and there throughout the day, and it can add up to an empty wallet very quickly.
Give yourself an allowance for each week. Take that amount in cash and spend only cash on your discretionary (non-essential) purchases, like coffee, cocktail hour drinks, or the nail salon (I like to call this “fun money”).
You will now be able to physically see how much you’re spending (and more importantly, how much is left in your wallet after each purchase). If you run out of of “fun money” before the end of the week, well, time to reevaluate your spending and take another look at your budget.
Get Old School with Your Budget
Don’t laugh, but sitting down with pencil and paper is a great way to work on your budget. Yes, I know there are apps for this, but I always say, keep it simple.
So, we all know that you can’t spend more than you have, right?
So start with the amount you take home per month. If you’re paid weekly, multiply by 4.3 to estimate your monthly take-home. If you’re paid every other week, multiply by 2.6.
Next, make a list of all of your essential expenses. These we be the expenses that we cannot live without. These would include rent or mortgage expenses, utilities, car expenses, food and clothing, and medical care.
Now, subtract your total monthly expenses from your take-home pay, and see what’s left. This is called your “discretionary” income.
Finally, make a commitment to allocating some of your discretionary income to savings, and the rest is your “fun money”. As discussed above, you should keep and use fun money in cash for better expense tracking.
Stay Local With Your Money
Many people maintain bank accounts at major, national banks. While this may be convenient because there are branches and ATMs all over the place, consider using a local, community bank.
For one, these banks tend to charge fewer and lower fees. You want to avoid monthly maintenance fees, statement fees, minimum balance fees, and the like. While these may only be a few dollars here and there, it can still add up. Every dollar you give to the bank is one less dollar you have for savings and fun.
Also, local banks tend to provide more personalized customer service, and value their relationship with their bankers. A big bank does not care about your measly few thousand dollars, but a local bank will welcome your smaller deposits.
Finally, when it comes time to make a big purchase, like a home, getting a mortgage may be easier because they value their relationship with you and may be more willing to look past a few bad accounts (or a prior bankruptcy) on your credit report.
Monitor Your Credit Report
Identity Theft runs rampant in today’s day and age. So keeping an eye of your credit report will ensure you are quickly alerted to any fraudulent activity, allowing you to take action right away.
More commonly, however, your credit score is affected by accounts that are misreported or duplicated on your credit report.
You can get a free credit report from www.annualcreditreport.com each year. They offer a report from each of the three major credit bureaus (Equifax, Experian, TransUnion). Select one each year and review it carefully for any fraudulent accounts or suspicious activity, and take note of accounts that are improperly reported or duplicated.
Repair Your Credit Report When Needed
If you do find fraudulent accounts or misreported debts, you should know that these will affect your credit negatively.
In the case of a fraudulent account, you will want to take steps to mitigate the damage. This includes notifying the proper bureaus and authorities, filing police reports, and notifying the creditor.
In the case of misreported or duplicate accounts, you will want to dispute these directly with the credit bureau.
While you can do any of these on your own if you’re willing to put in the time, there are professional agencies that can provide assistance, for a fee.
Rid Yourself of High Interest Debt
If you’re struggling to pay your basic expenses, and have been unable to save, you are likely relying on credit cards to make up the difference. But these balances can add up quickly, and with the average interest rate being somewhere around 18%, making minimum payments will not help to get you out of debt.
Bankruptcy laws provide relief for those people who have suffered a financial setback and cannot keep up with their debt payments. Credit cards, medical bills, unsecured personal loans and debts owed from a repossessed vehicle or foreclosed property can all be eliminated in as little as 4 months, and most people do not have to make any payments at all.
As discussed above, there are many ways to improve your credit after a bankruptcy, and most creditors will still gladly do business with you. The more time that passes from your bankruptcy, the better chance you have. Most lenders will even give you a mortgage after only 2-4 years after a bankruptcy. Compare that to a 7-10 year payoff period on your credit cards, and it’s really not a very long time.
In conclusion, good credit begins with a healthy financial lifestyle and a major part of that is paying your bills on time and having savings available to avoid debt. Bankruptcy is very often the first step to putting you on track for a health financial lifestyle.
For more information about bankruptcy or any of the other matters discussed above, please call, text or e-mail for a free initial consultation. I can determine eligibility within 15 minutes for most calls.
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