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

Preparing Yourself Beforehand

Securing new credit is a polarizing decision for people who have completed a Bankruptcy or Consumer Proposal. The idea fills some with fear and anxiety. While for others, it’s necessary to begin a new chapter in their financial journey. Regardless where you sit, it’s important to prepare for the challenges and potential roadblocks ahead. Building the skills and strategies to effectively use and manage credit will improve your confidence, position you as a worthy prospect for potential lenders and prevent you from indulging unproductive habits and temptations. But before we get ahead of ourselves, let’s first look at the steps that need to occur before you ever fill out a credit application.

Design Your Personal Spending Plan

Managing credit begins with managing your household income and expenses. A comprehensive spending plan is the only way to know whether you can afford credit — and how you will consistently pay off your purchases. 

Plan Your Work, Work Your Plan

Create a customized budget you will stick to month after month. Whether you use an app connected to your bank account, an Excel spreadsheet or a simple notebook, take time to review different methods and techniques and find one that works for you. You can refer to the tip-filled material provided during your insolvency counselling sessions, or do some additional research online. If you expect to use credit cards, include that as a specific spending category. This is how you will keep your credit spending in line. If there’s no money in your budget to allocate to credit cards, you can’t spend on your credit card: No credit card expense budgeted means no credit card spending, period.  

Boundaries, Not Restrictions

Your budget is an opportunity to make the best use of your money. It’s not a punishment or restriction. Think of it as setting boundaries. You’re building a fortress around your spending to help you understand if, when and why your spending — and especially your credit spending — might be trending toward uncomfortable territory.

Save Money

You may wonder 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, you won’t be reliant on credit to get by financially. 

You’ll Be a Lower Credit Risk

Say a friend comes to you for a loan. You know he’s always broke, behind on his rent, can’t keep a job for more than a few weeks. And, he didn’t pay you back the last time he borrowed from you.  Now imagine another friend. He tells you he’s short on paying his mortgage because a family emergency forced him to take a week off work without pay. He provides you with a written plan and clear explanation for how he will pay you back 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 of some sort, or even equity in a home or a vehicle — it shows the lender you are organized and have a history of responsibly managing your finances. Money in the bank simply communicates a better story than no savings at all.

You’ll Use Credit Less Often 

Building up multiple savings pots can help you resist using credit cards — especially during emergencies or for large purchases that may be difficult to pay back in a timely manner.

Pot One: Emergencies 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’ living expenses. You will never touch this is money unless it is truly an emergency. 

Pot Two: Occasional Expenses Consider expenses that come up occasionally, quarterly or even once a year — such as memberships, property taxes or school supplies. Make a list with the approximate cost of each. Add these together and divide by twelve. Now you have a dollar value to set aside each month in a separate account which you will only use for one of these expenses. 

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

Peace of Mind

Consider how much better your life will be with the confidence of having access to credit, but not needing it because you’ve already covered your financial bases. Also the knowledge 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.

Do Your Research

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

Not the Best Product; the Best Product For You

Travel rewards, cashback, low interest rate, no annual fee, etc. — there are dozens of credit cards on offer. 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 could have simply saved for the vacation instead. Not to mention, 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 will go a long way to prevent thoughtless credit card spending. 

Be Patient

Your credit will not rebuild itself overnight. Managing your credit is a lifelong process that will be challenging at times and easier at others. You’ll need to exercise discipline and 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 toward 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. 

Based out of Surrey and the Fraser Valley, Linda Paul is a Licensed Insolvency Trustee and Senior Vice President at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 310.DEBT (310.3328) or toll-free at 1.877.363.3437. Based out of Courtenay, Selina Jacobson is an Assistant Estate Manager at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 1.877.363.3437 or toll-free at 310.DEBT (310.3328).