How to Rebuild Your Credit Score

Bankruptcy is seriously detrimental to your finances, and it can feel like you are stuck in a hole you can’t dig yourself out of. Bankruptcy is common, however, with thousands of people filing for it annually, so it may be more common than you think.

Filing for bankruptcy doesn’t mean your financial state is ruined; in fact, it’s a great chance to start over. Surviving bankruptcy can be tough, but it gives you an opportunity to build credit and become financially safe and smart.

Once your debts are forgiven, you’ll have to start from scratch to rebuild your credit score. Follow these tips to rebuild credit, whether it’s after bankruptcy or simply after a financial rut.

Form a New Budget

One major reason why people file for bankruptcy or why they have poor credit is their inability to stick to a budget. The best thing to do to get your finances in order is to create a new budget, and diligently stick to it.

Put your post-bankruptcy expenses in three separate columns: fixed, variable, and irregular. Fixed expenses include things car or house payments that you can expect each month. Variable expenses occur every month, but they are subject to fluctuations; examples include food, fuel, clothing, or bills that fluctuate. Irregular expenses do not occur every month, and they generally can’t be predicted or budgeted for specifically. Things like medical fees or unexpected repairs fall under irregular expenses.

After you have created a detailed budget, decide on a plan that will govern your spending. Sticking to a strict budget will ensure that you don’t fall behind on your bills, which is vital for our next, and arguably the most important tip for building credit.

Always Pay On Time

To rebuild credit, you must pay your bills on time! Any bills or other existing lines of credit must be paid off in time to rebuild your credit score. On time payment is the best way to rebuild credit, and the most important factor in your credit score.

If you’re serious about rebuilding your credit, you can’t afford to miss a payment. Late payments will stay on record for seven years, so start paying on time now to start building your credit score back up to a healthy number.

Don’t Hit Your Credit Limit

Spending all the way up to your credit limit can hurt your credit score – especially if you can’t afford to pay it off on time. Aim to only use 25-30% of your credit limit to rebuild your score. If you can spend less, even better. Spending less on credit will boost your credit score, and it will make it easier to pay on time as well.

The amount of your credit you use is called credit utilization, and it’s one of the most important factors that affects your credit score.

Become an Authorized User

If you have friends or relatives that are willing to add you to their credit card, this can help your credit card score. When they make you an authorized user on their card, you can enjoy the benefit of not paying the monthly fees or applying for your own card.

As an authorized user on another credit card, you can build your credit score through the association with a healthy account paid on time. You don’t even have to spend money on the account or get a physical card – just being added to the account improves your credit. If you did want to use this line of credit for spending purposes, some cards allow the primary cardholder to set spending limits for secondary users. That way, a friend or loved one can easily trust you to responsibly use their line of credit.

The drawback to being an authorized user comes if the primary cardholder falls behind on payments. If they are late or behind on payments, the bad implication is not only in their report, but also goes into your report as well. The best advice is to pick someone you can trust that is very reliable and financially stable.

Rebuild with Loans

One other way by which you can rebuild your credit is by getting a loan. Choose a short term loan that will be easy to pay off. Credit-builder loans are named so for a reason: their function is to help you rebuild credit. A secure loan is another option if your credit score is especially low. With either of these loans, you’ll have to provide proof of income or provide a deposit to prove that you have the means to pay off the loan.

If you can’t or don’t want a credit-builder loan, any short-term one that has a flexible payment method will help rebuild credit. Being able to manage a loan and your card payment helps to boost your credit card score. It is absolutely vital that you are paying off your balances, be right on time with payment of debts, and reduce the utilization of the balance in your credit card. If you don’t stay on top of the loan payments, it will only hurt your credit score further.

Bankruptcy will leave a negative impact on your card report for a period of 7 – 10 years, there is no avoiding that. Still, there are methods to slowly rebuild your credit score over time. Use these credit rebuilding tips to improve your credit and get your financial life back on track!