How To Gain Control Of Your Finances After Debt Relief

You’ve accomplished the first step on the road to financial recovery after being entrenched in debt. So, what’s next? For starters, you’ll want to focus on rebuilding your credit score, staying out of debt and increasing your income.These tips will help you gain control of your finances again after debt relief.

Build your credit scores

If you’ve completed debt relief, you may have struggled to make payments on time or had to close accounts — or faced other factors that damaged your credit score. If that’s the case, now is the time to work on building your credit scores back up.

Sign up for credit counseling

Credit counseling is a good way to establish good money habits and get back on track. Counselors can help you set up a budget, manage your spending to rebuild credit, set aside money for emergency savings and avoid falling into debt again. Most frequently, credit counseling is offered by nonprofit services. So while you may have to pay a fee for the service, you could also look for free or low-cost options as you rebuild other aspects of your finances. 

Apply for new credit

Applying for new credit might be the last thing you’re thinking about after paying off debt. But in order to improve your credit score, you have to show the credit bureaus that you can pay back debt on time.

Start with a secured credit card that may require you to place a deposit for a revolving credit limit. Additionally, small loans such as personal or auto loans will diversify your credit and work toward improving your score as you pay back what you owe. 

Prioritize debt and bill payments

One of the best ways to manage your bills and ensure that they are paid on time is to enroll in autopay whenever possible. Set your debt payments up for autopay as well so that you never miss a payment, and check if your creditor offers an autopay discount. Some do, and this can help save you more money on interest. 

By setting up payments to the fixed expenses in your budget, you’ll know how much money you actually have for discretionary spending like travel, entertainment and dining out. You can also get into the habit of automatic savings each paycheck, which will further build your finances up for the future. 

Avoid carrying new debt — within reason

Whenever possible, avoid carrying debt on your credit cards from month-to-month. While taking on new credit will be useful for building up your score, carrying a balance will cost you money on interest. Since the annual percentage rate (APR) on a credit card can be 20% or higher, the interest you pay can and should be avoided. 

Unfortunately, life happens and sometimes you may have to carry a balance in the event of unforeseen medical bills or other emergency expenses. If this happens, it’s important to make a plan to pay off that debt as soon as possible.

Focus on your spending

The most important skill to build, both during and after debt relief, is responsible spending. By doing this, you can work to avoid the bad habits that resulted in your debt to begin with and find ways to save money where you can.

Create a budget

A budget is an outline of your fixed and variable expenses. Your fixed expenses are those that don’t change every month, such as your housing, car payment and cell phone bill. Variable expenses, on the other hand, will change over time. These expenses include your utilities, gas for your car, groceries and credit card payments.

Creating a budget gives you a bird’s eye view of what you pay for each month so you know how much you’re spending, what you can cut and how much you can put toward savings after debt.

Keep your credit card balances low

Keeping your credit utilization ratio under 30% can help improve your credit score. The amount that you owe is the second-highest factor that the credit bureaus take into consideration when calculating your credit score. It is calculated by dividing the amount you owe against your credit limit — so if you have a balance of $1,000 on a credit card with a $3,000 spending limit, you’ll have a 30% credit utilization ratio. 

Since your credit utilization ratio only considers the amount of debt you have on revolving accounts like credit cards, installment loans (think mortgages and car payments) won’t have an impact. However, they will contribute to your debt-to-income ratio, which is another number to keep low, especially if you plan on applying for new credit in the near future.

Negotiate or lower your bills

Another good way to focus on your spending is to simply spend less on your regular bills. For example, contact your cell phone, internet or TV provider to ask if they have promotions that you can take advantage of. Consider buying groceries or toiletries in bulk where you can or reconsider some of your unused subscriptions. 

Find ways to earn more

At a certain point, you’ll have reduced your spending by as much as you can. When that happens, it’s time to consider making more money to support your budget and financial goals after debt relief.

Consider side hustles

Having a side hustle has become a necessary reality for many Americans to make ends meet. If you can find the time, a side hustle might be just what you need to get ahead.

Some popular side hustles include becoming a virtual assistant, opening an online store and becoming a dog walker. Utilize a skill or interest you already have to bring more money to your household.

Apply for benefits

If you don’t already have benefits like SNAP or housing assistance, you may want to consider applying. If you qualify for government benefits, the money you save can help you further pay down debt or even begin to save money for the next rainy day. Remember, these programs are in place to help when you aren’t making enough money, so don’t be afraid to apply when needed. 

Build an emergency fund

Building an emergency fund is a crucial step in your debt relief journey. Experts recommend saving three to six months’ worth of expenses as an emergency fund, which can be a large and daunting number. However, starting small and consistently — perhaps by automating your savings each paycheck — you will slowly build yourself some breathing room and prevent you from relying so heavily on credit when the next emergency inevitably happens.

Bottom line

There is light at the end of the tunnel after debt relief. Rebuilding your credit score is something that, in the long run, you’ll be glad you did when it comes time to make a large purchase or pay for an emergency. By focusing on your spending and increasing your income, you can continue to pay down debt while building your savings so that you hopefully never find yourself in debt again.