Economic cycles govern our personal and financial lives. Life's uncertainties—job loss, emergencies, foreclosures, bankruptcies—can severely damage credit.
While financial crises can be daunting, they are not the end of the road. With a commitment to bouncing back, discipline, careful planning, concrete goals, and strategic choices, it is possible to recover from financial troubles and rebuild your credit status.
Bad credit carries numerous disadvantages. It makes it challenging to qualify for credit cards and loans. It puts you at a disadvantage in the job market. It can complicate simple life decisions like renting a place at an ideal location. Moreover, interest rates, insurance premiums, and security deposits could all increase.
Today, about 33 percent of American adults rate fair to poor PICO scores, reflecting how widespread the problem of poor credit is. Bankruptcy will likely exacerbate any credit issues, causing an initial drop of about 100 to 200 points in your credit score.
Getting on top of your financial woes and rebuilding credit as soon as possible is vital to financial recovery. Here, we discuss rebuilding your financial health from scratch and improving your credit score for a sustainable future.
Step 1: Assess the Damage to Your Accounts
Determine the starting point by assessing your financial situation. Examine debts, expenses, assets, and income.
Review liabilities
Assess all your current liabilities. Include interest rates, minimum payments, and outstanding balances in the data. Rank your debts, starting with the ones with the highest interest rates. Explore how to pay for the high-interest debts first, and explore debt consolidation or restructuring options.
Check your credit report
You must be familiar with your credit report. You can access a free copy of your comprehensive credit report through the major credit bureaus: TransUnion (NYSE: TRU), Equifax (NYSE: EFX), and Experian (OTC: EXPGF). These three bureaus are the largest providers of consumer credit reports to lenders in the US. They also provide such reports to employers, insurance providers, and companies that need credit information to help assess risk.
Armed with this new knowledge, you can easily identify and report discrepancies, inaccurate records, and fraudulent activities. After weeding out all errors in your credit report, you can use the information to develop a strategic plan to rebuild your finances.
When you understand the components of your credit score, you can find out what's been bringing it down. With this review, you can also monitor and confirm whether your bankruptcy has been removed from your report as soon as possible. In the US, it's after ten years under a Chapter 7 and seven years after a Chapter 13 bankruptcy.
Step 2: Develop a Strategy for Financial Recovery
Once you've assessed your post-crisis finances, take proactive steps. Develop a comprehensive financial recovery plan encompassing realistic goals, debt repayment, emergency savings, and credit repair.
Define your financial goals
Every financial strategy begins with objectives. Define your financial strategies by establishing short, intermediate, and long-term goals. These objectives may involve debt clearance, emergency fund creation, retirement savings, vacation planning, business initiation, home purchase, or overall financial security enhancement.
They can also involve investing, growth, and having room for the finer things in life. More importantly, they should include rebuilding your credit score if you just came from bankruptcy or another financial crisis.
Develop a plan for debt repayment
Once you've identified your goals, you must develop a plan to repay debt. It would be best to prioritize paying your debts according to outstanding balances and interest rates. However, you might prefer to see things from the perspective of either the debt snowball or debt avalanche.
The debt snowball strategy encourages you to pay off the smaller debts first, building momentum toward paying more significant obligations. The debt avalanche technique accelerates repayment by prioritizing high-interest debts and working your way down. In each of these methods, you aim to build momentum towards knocking off debts based on what incentivizes you and what your financial situation affords.
Save for an emergency fund
When attempting to rebuild credit after a financial crisis, you must never forget to allocate money towards emergency funds. Even though you are paying off your debts, you need an emergency fund to ensure financial stability. You must have about three to six months' living expenses in an untouched separate account.
Why is an emergency fund necessary? It provides a financial cushion for unexpected events, preventing you from getting further into debt during future crises.
You also need to know where to save your emergency fund. A few good options would be a high-interest-rate savings account via an online bank and a high-yield savings account. Ensure your bank or credit union insures deposits through the NCUSIF or FDIC.
Develop a strategy to reestablish good credit
Rebuilding credit is crucial to getting back to financial health. There are faster ways to improve your credit, but each requires discipline, determination, and focus. Below, you will find concrete steps to start fixing your credit even as you are still dealing with the after-effects of loss or bankruptcy.
How To Rebuild Credit After a Downturn
Now that you have a basic idea of the framework for credit recovery, let's get into the details. After experiencing a bankruptcy or severe financial slump, you could find it challenging to demonstrate to lenders of future financial capability.
After assessing your starting point and becoming fully aware of your credit situation, you must immediately work on understanding how to increase your credit score. You can improve your score in the following ways:
Pay on time
Changing your financial habits means one crucial thing: first, pay ...