As a business owner, there is a multitude of financial responsibilities to uphold for both your business and personally. If you found yourself in a personal situation where you are struggling to pay the basics or keep up with current expenses you may be in a cycle of debt and it’s probably time to file for bankruptcy.
Bankruptcy has its pros and cons but it’s ultimately a chance to start fresh. After you’ve gone through the legal process to get your financial life back on track, you’ll likely need to strategize a plan to rebuild your credit. There are three key factors to ensure you stay on track with your financial goal: oversight, planning, and accountability.
Here are a few steps to rebuild your credit with these key factors in mind:
Step 1: Review Your Credit Reports
The purpose of bankruptcy is to get your financial life back to a healthy condition. The first step in rebuilding your credit is evaluating where your credit score now stands on the spectrum. To gain an accurate view – gather your credit information from the three national credit bureaus: Experian, Equifax, and Transunion. Each credit bureau is required by federal law to provide a free annual credit report.
Once you’ve acquired your reports review them for inaccuracies some common issues you may notice are incorrectly reported accounts or late payments. If this occurs, reach out to the appropriate credit bureau to dispute your inaccuracies.
Step 2: Create a Monthly Budget
Creating a monthly budget will help ensure you have a handle on your cash flow and give yourself a better understanding of where your expenses are going. Start by adding up your after-tax income from your hourly/salary wages and include other forms of income that may be coming from investments and Social Security checks. The cost of living is constantly increasing, and can vary greatly based on where you live. Check out the map below and hover over your state to determine the Cost of Living Index in your area.
Start recording your bills and expenses. Deduct your rent, monthly bills, and groceries. Then start to deduct the average amount you spend on eating out and buying miscellaneous items. Start comparing your income with your expenses. See where you have room to contribute money to paying down any existing debt or saving. Continue to keep track of your budget manually by using a spreadsheet or autonomously with a user-friendly budget tracking app. The importance of tracking your monthly budget is that it will reveal any spending habits that you need to ditch. If you find that bills are too high, you might need to vet which ones you can knock down through bill negotiation or remove entirely.
Step 3: Consider Opening a Credit Building Loan
Depending on your situation a credit-builder loan may be a great option to help rebuild your credit. Several online lenders and local credit unions offer these types of loans. To break it down it’s essentially a backward loan, you pay the lender that holds the money you agree to borrow in a bank account which it reports to credit bureaus for a term of 6 to 24 months. When the loan is paid off, the money is released from the account to utilize as you please.
Another loan worth looking into if your car is on its last leg is a bankruptcy car loan. Organizations like Day One Credit work with customers who have filed Chapter 7 or Chapter 13 bankruptcy rebuild their credit with a car purchase. The benefits are twofold: You’ll have a reliable means of transportation and improve your credit score.
Step 4: Open a Secured Credit Card
To get back on track with rebuilding your credit, you will need to apply for a credit card as soon as possible. Though it might be hard given your past experiences with your cycle of debt and bankruptcy, there is no way to fix and rebuild your credit without actively using credit. There will still be plenty of creditors and lenders that will be willing to work with you during the bankruptcy process. If you still have your car or your house following bankruptcy and are making current payments on them, repairing your credit might be easier than you expect.
Apply for credit cards for borrowers with poor credit that report to all three national credit bureaus. They typically have low upfront fees and provide prequalification checks. Depending on your credit score, you may or may not be eligible for an unsecured credit card. This means you’ll have to start with a secured credit card that requires you to make prearranged deposits. However much you put in as a deposit will act as your credit limit. Nonetheless, a secured credit card is still beneficial because it reports your payments and credit activity to the corresponding credit bureaus.
In the instance you don’t qualify for a secured credit card, you may have to ask a friend or family member to add you as an authorized user on their card. As long as the card is being used responsibly, your credit will slowly build up. You also have the option of having someone cosign a credit card or loan for you. In any case, you absolutely have to be mindful of the person who is putting their credit at risk for you.
Once you have a credit card, it is important to use your new card safely and responsibly. You want to start by using your card for simple purchases, like groceries and other necessities. Make sure to budget accordingly and pay off the card at the end of each billing cycle – set up auto-pay features if you can. From there, you can begin to use your card more frequently and for bigger purchases to establish a better payment history and credit utilization ratio.
Manage Your Budget & Accounts
Whether you decide to utilize secured credit cards or a credit-building loan it’s important that you take the three key factors of oversight, planning, and accountability into consideration to properly manage your accounts. A crucial part of managing your new accounts will be making on-time monthly payments and balances paid off. This will ensure that the worst is behind you and you can start living a healthier and happier financial life.