In 2012, the American Bankruptcy Institute reports that Americans filed 1,181,016 non-business bankruptcies. Even though bankruptcies have dropped significantly from the previous three years, many American families and individuals are still taking some serious financial hits.
If you’re among the millions of Americans who have recently filed for bankruptcy, it’s never too early to start thinking about rebuilding your credit. And even though a bankruptcy filing will stay on your credit report for up to ten years, there’s much you can do in the meantime to begin building your credit score back up.
Here are five ways to begin:
1. Look at the underlying causes
Unfortunately, one study from St. John’s University found that about 16% of US bankruptcy filings were repeat filings, and about 8% of bankruptcies were filed by those who had already filed one or more times. That means that nearly one in ten people fail to fix the underlying causes of their financial issues, so they stay on the merry-go-round of bankruptcy for another ride.
Before you do anything else to rebuild your credit, then, look at the underlying cause of your bankruptcy. Did you speculate too much on a business venture by taking on personal debt? Did you make one or two big-ticket purchases? Or were you simply living consistently beyond your means? Maybe you were just slightly overextending yourself in debt, and you lost a job, even.
Take an honest look at the reason or reasons that you had to file for bankruptcy, so that you can take steps to fix these issues in the future.
2. Order your credit reports
Next, order credit reports from all three credit reporting bureaus – Equifax, Experian, and TransUnion. You’re entitled to one free report per bureau per year, but it’s worth your while to pay for reports if you must. You might also want to check your actual credit score (different from your credit report!), which usually costs around $5 extra per bureau.
First, be sure that your credit reports include accurate information, both personal information like your name and address and financial information about your bankruptcy proceedings. Then, check the damage that your bankruptcy did to your credit score. Once you know where you’re starting from, you can dive in to improve your credit score.
3. Pay your bills on time
The single most important piece of your credit score is how you pay your bills on time. Missing payments – which most people do before they file for bankruptcy – can cause serious damage to your report. Making payments on time, on the other hand, slowly but surely builds your credit back up.
Do what you have to do to pay your bills on time. That may mean automating payments so you don’t forget, making extra payments once a month so you’re a bit ahead of the game, or even getting a part-time job to ensure you don’t run out of money before your bills are all paid. A careful personal or household budget can also help you ensure you have enough money to go around, so that all your bills are paid on time.
4. Start an emergency fund
One reason that many people end up in bankruptcy is that they’re always scrambling from one emergency to the next. So before you start taking out new credit, build up a small emergency fund. Just $1,000 is a good start, as this could be enough to fix a car or washing machine in a pinch.
Having an emergency fund keeps you from going into more debt when emergencies to arise – which they most certainly will! Just be sure that you only touch this fund in a true emergency. Keep it somewhere that’s hard to access – like a savings account not linked to a checking account – to reduce temptation to spend emergency funds on everyday items.
5. Apply for new credit, slowly and steadily
Finally, know that you build credit by wisely using credit. Wise is a key word there! If you go and rack up hundreds or thousands in credit card debt very quickly, your credit score won’t improve. It might even drop, as you’ll look even riskier to lenders.
Car loans and other secured loans can be the easiest option to get, but make sure you aren’t going to get fleeced with super-high rates. Otherwise, try taking out a secured credit card. This kind of card is easier to get with a low credit score because you pay a deposit before you can use the card. This ensures that the lender will get some money back if you default on your payments, making you more likely to get credit.
Taking these five steps will put you on the right path to recovering your credit after bankruptcy. Just be sure you learn to manage your money wisely, and you’ll go far in the future.
–Abby Hayes is a freelance personal finance writer and contributor for personal finance blog Dough Roller. She spends her spare time bargain hunting for her family of three.