Rebuilding Your Credit and Finances After Bankruptcy

Start to Improve your Credit Score

After discharge, it is time to check and start monitoring your credit score. Reviewing your report 60-90 days after discharge gives your creditors time to update their reporting and give you your credit score. A good credit score will save you money in interest, insurance rates, and even affect your employment. When you look at your credit score, it’s best to pick one type of score and stick with it. For example, you may want to choose between FICO and VantageScore. Each score is calculated a little differently and by following one, you can watch your score start to climb.

What do Credit Bureaus Look at When it Comes to your Credit Score?

While both FICO and VantageScore differ in their calculation, they both use similar factors in calculating their score. The factors are:

  1. Payment History
  2. Credit Utilization or Amounts Owed
  3. Length of Credit History
  4. Mix of Credit Types
  5. New Credit or Recent Applications

Your credit reports will show your payment history and whether or not you paid on time. One of the best ways to slowly improve your credit score is by paying all your bills on time. You can even link your utility and rent payments to the credit bureaus to boost your credit score. See Experian’s booster here and Transunion’s ecredable here. Set up auto-pay to help remind you to make payments on time.

Credit utilization is your balance to credit limit ratio. It measures how much of your credit limit you are using. For example, if you have a credit limit of $500 and have a balance of $100 your ratio is 100/500=.2 meaning you are using 20% of your available credit. A lower utilization ratio is the better it is for your score. Experts suggest not using more than 30% of your available credit. So, if your limit is $500, you should not exceed $150.

The other factors can also affect your scores, just not as much. The longer you have had credit, the better. The kinds of credit you have also matters. Having different types of credit such as a car payment and a credit card matter. The last factor looks at the number of recent credit inquiries and the length of time between inquiries.

Create a budget or use your Chapter 13 budget.

If you filed a Chapter 13 you already have a really good estimate of your income and expenses. You might want to stick to this budget and use the amount of your payment plan that you no longer pay and contribute that to savings or retirement. If you filed a Chapter 7, you can still make a budget you can stick with. Use the information from your Schedule I and J bankruptcy forms as a starting point.

Create an emergency fund and add more to your retirement.

If you can, you’ll want to set aside part of your monthly income for savings or retirement. You can make the funding part of your expenses section when you make your budget. Sometimes it is easier to do this every payday instead of monthly. You may even want to consider having your employer place your emergency fund amount directly into your savings account and the rest into checking. If you had your Chapter 13 plan payments come directly out of your check, this would be the same idea. Having some emergency money will help if something goes wrong such as an appliance repair or an unexpected medical bill.

Many clients we meet have very little saved for retirement, and that amount decreases even more if they do not have an employer-sponsored plan. If possible, put as much into your 401(k) that your employer will match. You can also check out the many retirement calculators online and see how much you need for retirement and if you’re on track.