How to Raise Your Credit Score and Bounce Back from Bankruptcy

There are a number of reasons that could cause you to file for bankruptcy, the top five reasons being medical expenses, job loss, poor or excessive use of credit, divorce/separation, and unexpected expenses. All of these reasons can cause your credit score to take a real hit. I’m going to be real with y’all. My husband has had several significant health issues over the past ten years, and the mounting medical bills were unbelievable. It was a huge factor in deciding to file Chapter 13 – which basically allows you to halt collection and/or repossession and allows you to reorganize your debt into manageable court-mandated payments that are taken directly from your paycheck each pay period.

After several long years (we felt as though the bankruptcy would never be over) it was finally discharged earlier this year. As a condition of filing bankruptcy and then having it discharged, you need to take a credit counseling class before and after. These classes are designed to help you understand how you got into the mess you are in and afterward, to help you start building your credit back up and being able to manage day-to-day expenses and unexpected life events. Here are just a few of the tips we learned from these courses.

Your Monthly Income

It doesn’t matter how little or how much you earn, there is a proven method that shows you how to break down your monthly income after taxes to cover ALL the bases.

  • 30% Housing
  • 15% Auto
  • 15% Food/Groceries
  • 10% Savings
  • 15% Debt + Charity
  • 15% Miscellaneous

Another way to divide up your income is the 50/30/20 rule. Needs account for 50% of your income, Wants account for 30% of your income, and Savings account for 20% of your income. I have been trying to use this method. I have 50% deposited to my checking account, 20% to my savings account, and the other 30% goes into a separate account that I use for the things I want. When the money is gone, it’s gone. In order to not have to think about the division, have your payroll department deposit the percentage you want into your accounts. Here’s how to break down your income:

50% of Your Income for Needs

What are the needs? Those are the bills you absolutely must pay every month and are essential for survival. These items include:

  • Rent/Mortgage Payments
  • Car Payments
  • Groceries (for food to cook at home, not takeout or delivery)
  • Health Insurance / Health Care
  • Utilities (heat, electric, water, telephone service)

If you are spending more than 50% on your needs, then it is time to cut down on the wants on your list. Perhaps downsizing your lifestyle – move to a smaller home, use public transportation more, trade in your gas guzzler for a more economical car, and cook at home more often. These are all things that can put a substantial amount of money back into your pocket.

30% of Your Income for Wants

Wants are exactly that – things or items you WANT but are not absolutely essential to surviving. I know this sounds harsh, but sometimes you have to severely curb the wants for a year or two in order to get to a place where you CAN start adding in things that you want and be able to afford them. Wants include:

  • dinner and a movie night
  • new handbag or shoes
  • vacations
  • the latest phone or electronic gadget
  • tickets to sporting events
  • gym memberships

Anything that falls into the wants category is optional. It is something you would LIKE but don’t necessarily NEED to survive. Let me give you an example, you WANT steak but have a hamburger budget. Another example is using an antenna for free television instead of spending money to watch cable TV.

20% of Your Income for Savings

This is a hard one for most people. You can add money to an emergency fund (your bank savings account), make IRA contributions, have a mutual fund account, invest in the stock market, or a combination of ways – whichever method works best for you. Just remember the rule of thumb is to have at least three (3) months of your salary on hand in emergency savings in case you lose your job or an unforeseen event occurs. After that, you can focus on putting some of that savings into a retirement account or meeting other financial goals you have set for yourself.

Budgeting and Borrowing

As I said, sticking to a budget and setting money aside that you do not touch is hard for most people. It’s hard as heck for me. Quite a few people I know struggle with this because if they have it, they want to spend it. It’s all about immediate gratification and not the long-term gratification or benefits of saving for a rainy day as I like to say. I am working my way out of debt at the moment with my full-time job, and after having depended upon just my income from blogging (which was never guaranteed from month to month) I’m struggling to find a balance.

A major portion of being successful with budgeting and saving is being able to self-discipline. You have to be willing to keep your eye on the bigger picture – your future – and make every financial decision based on that discipline and your future.

It has taken a bit of adjustment, working out what goes where and when, but I’m feeling good about my decisions and working to build a nest egg for the future. However, I had a scare just a few days ago that made me realize I’m not building my savings fast enough, and I am definitely not where I need to be to take care of any major car repairs.

Needing to Borrow Money

A few days ago, I was driving home from work and my car started making this horrid noise when I used my brakes. By the time I was able to pull into the nearest parking lot and get my vehicle off the road, I was shaking. There was this horrible, grinding noise when I pressed the brakes and then my car acted as though it was trying to shut off. All I could see was a huge car repair bill – something I could not afford – and would most likely lead to my having to borrow money.

So while I was waiting for my husband to arrive and pick me up, I started searching for viable places online to get a loan quickly in a pinch. There are many different types of loans available, but after reading the fine print and checking the interest rates, I realized this wasn’t a viable option – at least, not at this time. One rule of thumb I stick to is to never borrow more than I can comfortably repay within 2 to 3 pay periods. This was not one of those times.

You may be asking WHY this wasn’t an option for me and again, it goes back to credit scores. Mine is not that great because of the past 15+ years of not having ANY type of credit. The better your score, the better your chances of securing a loan at a decent interest rate. Protecting your credit rating is vital to being able to obtain a loan with good rates and ample time to repay the loan.

Conclusion

Your financial well-being comes down to one simple thing – your credit rating. Even if you have had to file for bankruptcy, there are ways to rebuild your credit. Making your payments on time accounts for 35% of your credit score, so never borrow more than you can comfortably repay. Having the discipline to stick to a budget is another method of rebuilding your credit. Remember to keep your financial future in mind during every purchase and ask yourself, “Is this something I need, or is it something I want?” Take things one day at a time and before you know it, you will begin to see your savings grow and your credit score rise and you will be happy for all the hard work you’ve put into rebuilding your credit.

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