Rebuilding credit is a journey. Being financially healthy is amazingly similar to being physically healthy—it's about changing your mindset regarding money and changing your relationship with spending. In other words, it's a long process that can't be finished in a few days or even a few months.
That said, there are things you can do to get yourself on track right this minute—actions that will
immediately improve your control over your finances and bring peace of mind. Today's blog is about Day 1: about the very first things you can do to get yourself on the road to financial health and stability.
If you're ready to get started, all you need is a piece of paper and a pencil!
Get Your Budget Ready!
The wisest people think of money like a river: you can't stop it from flowing away from you, but you can direct where it goes. A good budget treats money like flowing water—it keeps it flowing in the right directions while keeping it from spilling or leaking wastefully. The less leaks you have, the more powerfully the money can flow.
Your initial budget needn't include every single item you spend on. Rather, you just need to list out your "non-negotiables." Those are the things that you cannot function without paying for: water, electricity, mortgage/rent, car payments, credit payments, etc. If you only had enough money to survive, what would you pay for?
Once you have your non-negotiables, write down how much you spend on each one monthly. For some of them, the answer should be pretty precise—rent doesn't vary from month to month. For the ones that have some slight variation, slightly overestimate how much you'll need. For spending that varies wildly from month-to-month, choose the largest amount paid in the last 12 months and set that as your budget.
Once you have your non-negotiables and their costs all laid out, you have the part of your budget that you can't alter. These are costs that can't be ignored, which means they will cause you the greatest stress (which is why we're accounting for them first). Ideally, anything
not on this list will only be a source of discomfort, not stress or uncertainty.
Subtract your non-negotiables from your monthly income, and what you'll have left is discretionary spending. If there's not a whole lot left, that's okay—this is just where you start. If your non-negotiables outrun your monthly income, now you know that one of your non-negotiable expenditures needs to change, either by moving, using a bicycle, or getting creative.
The importance of this step is more than practical:
Putting the truth of your finances on paper is what gives you control over it. Even when it's scary, looking your finances head-on is how you empower yourself to make a change. In the process, you may realize that you have more control over your monthly budget than you realized—and that you can live without a lot of the expenses you once considered vital.
At first, you're not going to have a lot of "wiggle room" after non-negotiable items. But even if you're only left with $3 at the end of the month, you'll know that all of your vital needs are taken care of—and putting that $3 to work for you is more empowering than you know!
Apply for a Balance Transfer Card
This is only useful if you have a large amount of high-interest credit card debt. Interest payments can slow your financial progress down like nothing else—anything to lower your monthly interest spending is an investment in your future.
Balance transfer cards are credit cards designed to help people pay off their debts without dealing with interest. It works by allowing you to transfer your entire credit balance from your current, high-interest account to the balance transfer card. Your new card will have an introductory rate that's low (or even zero), giving you 12-18 months to pay off the principal of your debt without accruing additional interest.
If you're looking for a way to aggressively dig yourself out of debt, this might be the tool you need.
Pick Something to Buy with Credit!
No, we don't mean go on a shopping spree. We mean you need to get to work on rehabilitating your credit, and that means using your credit…but conservatively. The thing is, whether you're recovering from a bankruptcy or considering one, cutting up your credit cards haphazardly isn't the answer. Instead, you'll need to work on improving the different aspects of your credit score.
The 5 factors of your credit score are:
- Credit history (collections, late payments, etc.)
- Credit utilization (how much of your limit you've spent—aim for less than 10%)
- Credit length (how long your account has been open)
- Credit inquiries (how often you apply for loans or credit cards)
- Credit diversity (how many different types of borrower accounts you have)
Only time will heal your financial past, but you can start work on your credit utilization and invest in your credit history long-term! Here's how: pick a single, consistent expenditure to pay for with a credit card every month. Make sure you've already accounted for that item in your monthly budget, and make sure that the cost is less than 10 percent of your credit limit.
Good examples of things to pay for with credit are:
- Netflix, Amazon Video, HBO, etc.
- A single bill or two
- Any small, consistent line item on the budget
Whatever you choose, make sure you pay off the entire amount every month. This will show that you're using your credit in small amounts, making on-time payments, and acting like a trustworthy debtor. However, and this is the most important part, paying it off every month means you're not paying any interest. At no cost to you, you're improving your financial standing and getting yourself back on track.
Using these 3 techniques, you'll be able to take the reins of your own life back—and more importantly, you'll be able to sleep better knowing your future is on the right track.