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Rebuilding after bankruptcy

—Jason Alderman

No one takes the decision to declare bankruptcy lightly. Besides being an expensive, time-consuming and awkward process, bankruptcy can have serious and long-lasting impacts on your credit score, which in turn may affect your ability to borrow money, rent an apartment, or even get a job.

Whether you are emerging from bankruptcy, paying off accumulated debt, or just starting out financially and looking to avoid future mishaps, there are several steps you can take to build—or rebuild—stronger credit:

Monitor your credit. Negative information such as late payments, tax liens and foreclosures can remain on your credit reports for many years—up to ten years for bankruptcy. On the other hand, once you reestablish sound credit habits, such as paying bills on time and lowering balances owed, your credit score should start rising within months.

To ensure your improved credit behavior is being reported properly, periodically review your credit reports from the three major credit bureaus: Equifax (equifax.com), Experian (experian.com), and TransUnion (transunion.com). You can order one free report a year from each bureau through annualcreditreport.com.

Reestablish creditworthiness. One way to demonstrate your ability to repay debt properly (thereby later qualifying for more favorable lending terms) is to open a secured credit card linked to a savings account you maintain. Typically, you can only charge up to the amount on deposit, which prevents you from charging more than you can afford. In choosing a secured card, look for one:

That will convert to an unsecured (regular) credit card with more favorable terms after you’ve made several on-time payments.

That has zero or low annual and application fees and a low interest rate.

Whose lender will consider reporting your payment history to all three credit bureaus.

Be mindful of monthly usage fees and other charges that can deplete your balance. Try your credit union or go to websites such as bankrate.com, cardratings.com, or indexcreditcards.com to compare rates and terms.

Secured loans from a credit union or bank work in a similar manner: You take out a loan backed by a savings account. Your loan’s interest rate will be higher than the savings account earns, but successfully paying it off should boost your credit score.

Pay on time. The single most important thing you can do to improve your credit is to always pay at least the minimum due on all bills on time. Consider signing up for automatic payments from your checking, savings, or credit card account if this is a recurring problem.

Curtail amounts owed. Another major credit-scoring factor is credit utilization, which measures how much of each account’s credit limit you tap, as well as how much you’ve borrowed as a percentage of your total available credit. Aim for thirty percent utilization or less, even if you pay off balances each month.


Financial resolutions you can live with

—Jason Alderman

At this time of year, many people pause to reflect on what they’d like to change about their lives going forward—lose a few pounds, take a class, spend more time with the kids. Often, these goals revolve around personal finances.

But if you’ve been battered by economic forces beyond your control (as many have recently), it may be tough to craft financial resolutions ambitious enough to have a real impact on your situation—especially if you fear that unforeseen obstacles may later force you to scale them back or even lose ground.

That’s why I urge taking baby steps—setting small, meaningful objectives that provide a sense of accomplishment and that you can ramp up when your situation improves. Here are a few examples:

Scale back expenses. If you can’t make a big dent in your monthly costs, like refinancing your mortgage or selling an unneeded vehicle to eliminate a car payment, look for lots of little dents that can add up:

Save $10 a week by having one less fast food meal and to-go coffee; or rent a DVD instead of going out to the movies—that might save about $500 a year.

Lower the thermostat in the winter by one degree and save three to five percent on your utility bill—saving $5 a month equals $60 a year.

Drive slower. Each five mph you drive over sixty mph costs about $0.24 per gallon of gas. Properly inflate your tires, keep the engine tuned, and cut out aggressive driving habits and you’ll save even bigger bucks.

Shop around for better home and car insurance rates, and consider raising low deductibles. (Just make sure your coverage has kept pace with inflation.)

Balance your checkbook. Even though many banks have recently lowered fees for bounced checks and overdrafts, one a month at $25 a pop adds up to $300 a year.

Build an emergency fund. Financial experts usually recommend stowing three to six months’ expenses in an emergency fund. That’s a good long-term goal, but if it’s not currently realistic, don’t simply give up without trying—stash some of the cash you’re saving above, a few dollars each month. You won’t miss it and might just be saved from having to take out an expensive short-term loan to cover emergency car repairs or an overdue electric bill.

Get organized. Even if you can’t afford to pay off all bills in full each month, at least know where you stand regarding due dates, minimum payments due, and credit limits so you don’t inadvertently rack up higher interest rates or damage your credit score. If you’re a chronic procrastinator, set up automatic bill payment with your bank—it’ll save on postage as well.

Stick to your budget. If you don’t have a budget, make this the year you create one. Numerous online tools are available to help. For example, Practical Money Skills for Life, Visa Inc.’s free personal financial management program (practicalmoneyskills.com/budgeting), features budgeting worksheets and calculators, guidelines for living within your means, budgeting recommendations for back-to-school, holiday spending, travel, and much more.

 

     

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