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How should people use credit cards after bankruptcy?

On Behalf of | May 22, 2024 | Bankruptcy

Bankruptcy can be an overwhelming experience at first. However, credit cards are a valuable tool for a person regaining their financial footing.

Understanding how to utilize credit cards responsibly after bankruptcy is important.

Use cards sparingly

Using credit cards sparingly is important, since the temptation to overspend can hurt a person’s budget. It is important to avoid accumulating debt that cannot be repaid. One strategy involves using credit cards for small purchases, such as groceries or gas, and paying off the balance in full each month. This shows financial responsibility to creditors.

Keep credit utilization low

Credit utilization ratio, the amount of credit used compared to the total credit limit, plays a significant role in credit scores. Keeping the credit utilization ratio below 30% is ideal.

For example, if the credit limit is $1,000, spending no more than $300 is a way to keep a healthy credit utilization ratio. This practice shows creditors that the individual is not overly reliant on credit.

Avoid opening multiple accounts

Managing multiple accounts increases the risk of falling back into debt. Focus on responsibly managing one or two credit accounts before considering additional ones.

Set up automatic payments

Late payments can severely damage a credit score, especially after bankruptcy. Setting up automatic payments ensures that at least the minimum payment is on time every month.

This consistency in payments helps rebuild credit over time. If automatic payments are not an option, setting reminders can be an effective alternative to avoid missed payments.

Build an emergency fund

Establishing an emergency fund is important to avoid relying on credit cards for unexpected expenses. This fund provides a financial cushion, reducing the need to use credit cards in emergencies. A good rule of thumb is to save enough to cover three to six months of living expenses.

Rebuilding credit after bankruptcy requires patience. Individuals can improve their credit scores over time and reduce their anxiety.