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Life After Debt: I’ve Decided To Get Credit Again, How Do I Manage It?

After resolving a bankruptcy or a consumer proposal, the thought of applying for new credit can stir different emotions in different people. Some may feel uneasy, while others may view it as a necessary step towards a fresh start. No matter your perspective, it’s crucial to equip yourself with the right tools and strategies to effectively use and manage credit. This will not only boost your confidence but also make you an attractive prospect for potential lenders and prevent you from falling back into unhealthy financial habits. However, before we get into the nitty-gritty of credit management, let’s take a look at the preliminary steps that need to be taken before you even start filling out a credit application.

1. Crafting Your Personal Expense Strategy

Effectively managing credit begins with managing your income and expenditures. An all-encompassing expense strategy is the only way to ascertain whether you can afford credit and how you will consistently repay your purchases.

A. Budgeting: Plan and Execute

Devise a budget that you can adhere to month after month. Whether you use an app linked to your bank account, an Excel spreadsheet, or a simple notebook, invest time in exploring different methods and techniques to find one that suits you. You can reference the material provided during your insolvency counselling sessions, or conduct some additional online research. If you anticipate utilizing credit cards, include that as a specific spending category in your budget. This is how you will keep your credit spending in check. If there’s no money in your budget allocated to credit cards, you should not spend on your credit card: No budgeted credit card expense means no credit card spending, period.

B. Set Boundaries, Not Limitations

Your budget is your tool for optimizing your money use. It’s not a punishment or a restriction. Think of it as setting boundaries. You’re constructing a fortress around your spending to help you monitor if, when, and why your spending – particularly your credit spending – might be veering into dangerous territory.

2. Saving Money: A Key Ingredient

You might be wondering what saving money has to do with managing your credit. There are actually two benefits: One, savings make you more appealing to lenders. And two, having savings means you won’t be dependent on credit to finance your life.

A. Appearing Less Risky to Lenders

Imagine a scenario where a friend approaches you for a loan. You know he’s always strapped for cash, constantly behind on his rent, can’t maintain a job for more than a few weeks, and, he didn’t pay you back the last time he borrowed from you. Now consider another friend. He tells you he’s short on paying his mortgage because a family emergency forced him to take an unpaid leave from work. He provides you with a written plan and clear explanation of how he will repay you over the next two months. Which friend will you lend to? Creditors face the same dilemma. If you have money saved – whether in a savings account, an investment, or even equity in a home or a vehicle – it demonstrates to the lender that you are organized and have a history of responsibly managing your finances. Having savings simply conveys a better narrative than having no savings at all.

B. Using Credit Less Frequently

Establishing multiple savings pots can help you resist the temptation to use credit cards – particularly during emergencies or for large purchases that may be difficult to repay promptly.

i. Pot One: Emergency Fund

Designate one pot as a safety net for unexpected expenses. Start with a small achievable goal, like $1,000 – $2,000. Then strive to build up between three and nine months’ worth of living expenses. This money should only be touched in a real emergency.

ii. Pot Two: Occasional Expenses

Consider expenses that arise occasionally, quarterly, or even annually – like memberships, property taxes, or school supplies. Make a list with the approximate cost of each. Add these together and divide by twelve. This will give you a monthly amount to set aside in a separate account, which will only be used for one of these expenses.

iii. Pot Three: Specific Goals

Finally, build a third pot for a specific savings goal. This could be a down payment for a car or a house, vacation, or a large purchase. Make it personal and something you’re passionate about. Any money leftover after paying your living expenses and contributing to your other two savings pots can go here.

3. Enjoying Financial Peace of Mind

Imagine how much better your life will be with the assurance of having access to credit, but not needing it because you’ve already covered your financial bases. Also, knowing that even if you do use credit, you will only charge to your credit card exactly what you can afford to pay back within a month. You are managing your income and expenses and know exactly where your finances stand at any given time – that’s the textbook definition of financial peace of mind.

4. Do Your Homework

If you’re new to credit, don’t hesitate to ask questions. Do your research and read the fine print before applying for, signing for, or charging anything to your credit product of choice. Know exactly what you’re getting into and don’t make assumptions. Familiarize yourself with the interest rates, service fees, and payment terms – along with the consequences of not meeting your obligations.

5. Choosing the Best Product for You

Travel rewards, cash back, low interest rate, no annual fee, etc. – there are dozens of credit cards available. Take the time to compare features and choose what best suits you. Don’t let the flashy rewards some credit cards offer blind you. Always weigh the value of the reward against what you are sacrificing to get it. Most rewards cards have high annual fees and high interest rates. It’s also hard to resist the temptation to overspend just to accumulate points. By the time you’ve built up enough to use, you’ll likely notice their true value is significantly less than the interest you paid – and you could have simply saved for the vacation instead. If you don’t have the money to travel, a travel rewards card is useless to you. You may be better off with a cash back rewards card since gas and groceries are items you buy and budget for each month. You could also consider a regular credit card with no rewards, lower interest rates, and no annual fee. They may not be flashy, but they can go a long way in preventing thoughtless credit card spending.

6. Patience is Key

Your credit will not recover overnight. Managing your credit is a lifelong process that can be difficult at times and easier at others. You’ll need to exercise discipline, consistency, and most importantly, patience. Don’t rush into any credit decisions. Prepare your finances first to determine whether credit is even something you want or can afford. Start working towards specific savings goals, especially for purchases you may have automatically put on a credit card in the past. Know the ins and outs of any credit product you’re interested in. If you follow these simple suggestions before you get credit, you can be confident that managing it will be even easier afterward.

Life After Debt: I’ve Decided To Get Credit Again, How Do I Manage It? is a journey that requires careful planning and execution. But with the right tools and strategies, you can confidently navigate and control your credit, setting yourself up for a healthier financial future.

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