NerdWallet's Smart Money Podcast - No-Spend Month 2.0, and Recovering From Credit Damage

Episode Date: January 30, 2023

A no-spend month is a chance to retool your relationship with how you spend money — and tuck away some extra cash. To start this episode, Sean Pyles and Liz Weston talk about how they’re approaching the no-spend-month challenge this year. Then they answer a listener’s question about how to recover from damage to their credit, including how to land an apartment or get a car loan. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Also, we are running a book sweepstakes ahead of our next Book Club episode! In February, we're talking with Axton Betz-Hamilton, author of "The Less People Know About Us: A Mystery of Betrayal, Family Secrets and Stolen Identity,” a book about what happens when the person who steals your identity is your own family member. To enter for a chance to win our book giveaway, send an email to [e-mail] with the subject "Book Sweepstakes" during the sweepstakes period. Entries must be received by 11:59 p.m. PST on Feb. 16. Include the following information: your first and last name, email address, ZIP code and phone number. For more information, please visit our official sweepstakes rules page. Timestamps: This Week in Your Money segment: 0:00 - 10:59  Money Question segment: 11:00 - 22:53  Like what you hear? Please leave us a review and tell a friend.

Liz, can you believe it? It's one of my favorite times of the year. Oh, really? Why is that? Well, as of last week, the IRS is now processing tax returns, which means that the 2023 tax season has officially begun. You need professional help, and I'm not talking about a CPA. Okay, I will not dispute that, but I do love to check something off of a to-do list, and that's how I view taxes, essentially. All right, then. Welcome to the NerdWallet Smart Money Podcast,

where you send us your money questions, and we answer them with the help of our genius nerds. I'm Liz Weston. And I'm Sean Piles. And as I mentioned, it is the beginning of tax season. We are working on an episode to answer all of your tax questions. So let us know what you're wondering about. Maybe you need to harvest some losses or you're filing jointly for the first time. Congratulations. Send us your tax questions by calling or texting us on the nerd hotline at 901-730-6373. That's 901-730-NERD or email us at podcast at nerdwallet.com. This episode, Liz and I take on a listener's question about how to overcome negative marks

on your credit report. But first, we are kicking off our no spend month challenge for 2023. Woohoo! We are excited about the weirdest things. Well, that is why we are the money nerd people, I suppose. Yes, yes. We did this last year and it was a lot of fun. It was a way to engage with our listeners and also mix up our spending habits. But to start for those who are new to this concept, let's give you a quick explainer. No spend month is basically a month where you don't

spend money on your quote unquote wants with the goal of understanding your spending triggers, maybe breaking up your shopping habits and hopefully saving some money. Yeah. And it can be really helpful right now. People are still feeling the squeeze of inflation. Maybe they're getting the bills from holiday spending that's still coming in. So it can be kind of a way to reset your spending for the year and just figure out what you really are spending mindfully on and what you aren't. Yeah, I think folks should consider it like a dry January for your spending, a way to break up the things that you would do previously without thinking twice about it, like getting maybe a second drink at a happy hour.

But this time around, you're just going for a ginger ale. I like that. I like that. Now, we've been doing this for a while, and we're each kind of modifying how we're going about this. So can you talk about what you're planning to do? Yeah, well, I will be honest and say that I've been doing a no spend month since the beginning of January. To break up my spending habits. I had a bit of a spending fit between Christmas and the beginning of the new year. All of those after Christmas sales really got to me and my weakness is clothes typically. So I was getting all these packages coming in at the same time as I was cleaning out my closet over the holiday break. And I realized I have so much more than I need. And that's something I'm trying to focus on is the idea that I have enough

and that I don't need more stuff. So why am I trying to buy things? What hole is that filling? There is something nice when I'm just bored at home about shopping around online, but I really don't need to be spending money on things. And I have other long-term goals that I would rather funnel that money toward. So that's something that I'm keeping in mind. Okay. So you decided that you're not going to spend money on what for how long? Well, I'm not going to be spending money on clothes actually for the first six months of this year. That's one of my goals. And then if I do happen to buy something, I love a funky shirt, for example. I am such a sucker for a cool pattern. So if I do fall in love with a shirt wherever I am, I am going to get rid of one that I have already because I have a closet full of funky patterns and half of them I haven't worn in maybe a year. So again, I have

enough. Okay. There's something out there called the compact and it started a while ago where people made a commitment not to buy new things for a certain period of time. And sometimes people have just stuck with it. They just try to find used alternatives or borrow or find some other way to do or get what they need without spending money. So that's another way to do this. And I think you found somebody that was going to do a no spend for a year, did you say? Yes, I follow this woman on TikTok. And she and her family are doing a no spend year for all of 2023

so that they can save up money to go on a vacation in Europe, which I found really inspiring. And as this woman's been starting off her no spend year, she's had an ongoing dialogue about the things that she is and isn't spending money on. And one example is some chairs that she saw on Facebook marketplace, and she allowed herself to buy those because they weren't a brand new item, for example. So I think as you're going through a no spend month, it's helpful to be very clear on the things that you will and will not spend money on. And if there's something that does fall into the category of things that you want to spend money on, but maybe it's more than you want to spend, find a compromise for it. I can give you an example

from how I've been spending my money recently over the past month, I just purchased this new watercolor botanical painting book. And in it, the artist recommends 24 different paints to use as she guides you through how to paint these different flowers, which are very beautiful. So of course, it can be tempting to think, okay, I need these exact paints to make these happen. And that's really not the case. It's recommended that a lot of people who want a more expanded watercolor palette will have 12 paints, for example. And then you can mix the different colors to get up to the 24 and do that on your own without having to spend twice as much money getting all of these different paint colors.

Okay, that makes a lot of sense. Well, Liz, when you've done no spend months in the past, how have you thought about the things that you will and won't spend money on? Basically, if it's something that's consumable, I'm pretty okay with it. But even then, like I still buy groceries, obviously, and still buy things that are perishable. But I also make more meals out of our pantry, going through the stuff that's stored before it goes bad, because we waste so much food, something like a quarter of our food budgets goes out the door is spoiled or has to be thrown away.

So just being more mindful of that is huge. And as you know, I'm going to be taken off for a couple of months. And so a no spend doesn't really work with our plans because we're going to be in Europe and actually needing to spend some money. And also, I love flea markets and I especially love flea markets in Europe. So I'm really looking forward to spending money there. But in preparation for that, I've been pulling eBay and Etsy and my other weaknesses, absolute support shopping habits, been pulling those off my phone and unsubscribing from newsletters. And it's a nice way just to remind yourself that shopping really shouldn't be a full-time pastime.

It should be something that you do to get the stuff that you want. But like you said, it's really tempting to be scrolling through all these different listings and fantasizing about what to buy and maybe even betting on a few things. So getting rid of that, getting those temptations out of the way before our trip has helped me save some money. Right. Well, you mentioned apps earlier. There is one app that I have found extremely useful

throughout this no spend month. And as I'm going into my second no spend month now, that is the notes app on my phone. I created two tables in this app. And one is for things that I want, but I'm not spending money on. And the other one is for things that I am allowing myself to spend money on.

This table has three columns. One is for the item itself, how much it costs, and why I want it. Or in the case of the table for things that I purchased, why I did decide to purchase it. And one thing that's been interesting as I've gone through this no spend month is looking back on the things that I wanted to spend money on in the beginning of the month. And often I don't want or care about these things at all anymore. So that's been kind of nice is to realize, okay, these things that I would have just reflectively spent money on if I wasn't doing a no spend month, I actually did not need at all.

And I've been able to save a couple hundred dollars just by not buying those things alone. Nice. We talked about the importance of having that list that you put something on and you wait a few days, a few weeks, whatever it takes. So the initial, I gotta have it, cools off and then you can be a little bit more objective about it. Yeah, and that's my weakness

is that I'll find something I will hyper fixate on and think to myself, this is what I need to fulfill X need or X dream that I have, like all those paints that I wanted. But it can be really useful as well to look through that table as the month goes on. And think about those items that you have continued to want. And there's nothing wrong with going ahead and purchasing those later on. But there is a fine balance between purchasing a

few of the items that are on that list of things that you wanted to get and then swinging completely in the other direction and buying everything that was on your list. The idea is not to just hold off for a few weeks and buy these things once the no spend month is over. The idea is actually to realize that you don't need to spend money on all these things that you might impulsively want to throw money at. Yeah. And people are going to do this differently. So you do really set your own boundaries and figure out how it's going to work

for you, but can really help to have a buddy, somebody to share your progress with, share your frustrations with, share your triumphs with. So find somebody else who's out there who's doing it or share your progress with us. Right. We want to hear how this is going for all of you. And we will be doing check-ins throughout the month. So if you want to share the things that you are and are not allowing yourself to spend money on, hit us up on the Nerd Hotline, 901-730-6373. You can call or text us there or just shoot us an email at podcast at nerdwallet.com.

And we'll keep this conversation going throughout the month. That sounds great. Okay. Well, I think that covers it for now. And before we move on, we have some exciting news. We are running another book sweepstakes for our nerdy book club series. Next month, we are talking with Axton Betts Hamilton, author of The Less People Know About Us, A Mystery of Betrayal, Family Secrets, and Stolen Identity. This is a book about what happens when the person who steals your identity is your own family member.

And that's a good read too. To enter for a chance to win our book giveaway, send an email to podcast at nerdwallet.com with the words book sweepstakes in the subject line during the sweepstakes period. Entries must be received by 1159 PM Pacific Standard Time on February 16th. Include the following information, your first and last name, your email address, your zip code, and your phone number.

For more information, please visit our official Sweepstakes Rules page. Alright, now let's get on to this episode's money question segment. Let's do it! This episode's money question comes from a listener's text message. Here it is. Hi, NerdWallet. I have been binging your podcast this weekend. Thank you for churning out so much helpful information. My question. I filed for bankruptcy in July 2020. I have been working so hard to increase my credit, stay out of debt, and get in a better financial position. I was under the impression that after two years, the bankruptcy mark on my credit report would not

be as visible. It is so challenging being denied auto loans, credit cards, and apartment leases. Do you have any tips for me, or do I just have to carry this burden around for another five to seven years? Thank you. Liz and I are going to tackle this question ourselves because in this case, we are the genius nerds. I have done deep dives into all aspects of credit, debt, and bankruptcy. And Liz actually wrote a book about credit scoring. And she's been writing about credit scoring and bankruptcy for a couple of decades now, actually.

Oof, yeah, way too long. So let's start with some general information about how long negative stuff stays on your reports and how it affects you over time. So in general, negative marks are going to stay on your credit report for around seven years for most negative marks. Chapter seven bankruptcy, which it seems like this listener filed, will stay on your credit report for 10 years. So our questioner thought it was maybe the most impactful after two years. What's the actual reality there? So here's kind of the tricky thing that's going on in our listeners' question. The mark of bankruptcy is not going to become less visible on their

credit report over time, but the impact on their credit score may diminish as time goes on. A 2014 report from the Federal Reserve Bank of Philadelphia found that folks' credit scores returned to pre-filing levels after about a year and a half. So that's some good news. And this is in part because a lot of the worse of the damage around accounts being charged off has already happened by the time someone has filed for bankruptcy, most likely. But again, the mark of bankruptcy will remain just as visible on the credit report for the duration of his time on there. It seems like our listeners are kind of conflating these two things. Yeah. And just to be super clear, people's credit scores really take a lot of hits in the months and years before they file for bankruptcy because they're missing payments, the accounts are being charged off. So when they file, their scores might drop a little bit more

or maybe even a lot more, and then they'll improve over time. It's not like you'll go from having a 550 score to having a 700 score overnight or even after several years. But scores do typically start improving after bankruptcy. Our listener is concerned about the mark of bankruptcy following them for so long because it's impacting their ability to get lines of credit or maybe even a lease on an apartment. So let's talk about how able or not people are to get approved for these sort of things after they file for bankruptcy. What are your thoughts on this list? Well, I think lenders' willingness to extend credit really varies, and it often depends on what's going on in the broader economy.

So if the economy is booming, a lot more lenders are going to feel willing to take the risk on people who have damaged credit. With recessions or downturns, a lot of lenders pull back and suddenly they only want to deal with people with good credit. But regardless of what the economy is doing, you still want to shop around because lenders don't necessarily move in lockstep. There may be a lender that's more willing to take risk than another, and you won't know that if you don't look around. And this is true for those who maybe don't even have delinquent marks on their credit

report. I remember back in the early days of the pandemic in 2020, there were folks that were seeing lines of credit closed or even credit limits reduced because of the fear from credit card companies about what was happening in the economy. However, there are things that people can do to get around the very visible and overly stigmatized, in my opinion, mark of bankruptcy on their credit report. And when it comes to getting an apartment, I think it's important for people to demonstrate that they can afford the rent that they are hoping to pay.

And that means proving that they've made on-time rental payments in the past. It might include getting references from previous landlords or even employers or friends, trying to make the narrative that you are someone who is able to make this monthly payment. That's good advice. And maybe look for more mom and pop type landlords. I think the big rental companies are going to be much more by the book in terms of if you have bad credit, it's going to be tough. But if you go to somebody who just has a few apartment units and you can make a direct connection with them, that might help. And if you're really in dire straits and you have someone that you can lean on,

you might want to consider getting a cosigner, someone whose credit you can essentially tap to help you get on a lease. But realize that a lot of people will not be inclined to do that because they would be legally on the hook for any realize that a lot of people will not be inclined to do that because they would be legally on the hook for any contract that they would be signing with you. Yeah, they'd really have to love you to do that. And maybe a little bit risky. Yeah, exactly. And when it comes to auto loans, unfortunately, folks should realize that getting a car loan

after filing bankruptcy will likely be very expensive. So a lot of folks recommend trying to put down as much as possible for a car so you don't need to borrow as much money because that loan would probably have a pretty high interest rate if you can get approved. Another advantage of doing that is that when your credit does improve, then you can refinance. If you have equity in the car, which means that you owe less than what it's worth, you typically could get a better rate as your credit improves. All right. Well, now let's talk about restoring credit after a big negative mark, like filing for bankruptcy or getting a derogatory mark of any other sort. What do you think people should do first, Liz? One of the classic ways of reestablishing credit is to use secured credit

cards. And these are cards where you put down a deposit and then the issuing bank will give you a credit line in the same amount. So you put down, say, $1,000 and you get a card with $1,000 credit limit. You make charges, you pay those off, and over time you typically can turn that into a regular unsecured card. Another option that folks might want to look into are credit builder loans. Can you explain how those work, Liz? Yeah, and actually this is a better option for many people because they may not have $1,000 to put down on a secured card. With a credit builder loan, you're actually borrowing the money, but you don't get it. Like right away, it's put into a savings account, a CD, something like that. There's no

down payment. You make the monthly payments over time, typically 12 monthly payments. And then at the end of the 12 months, you get the money back. So if you're borrowing $1,000, $2,000, whatever it is, that's the money that you get at the end. And in that one year period, you typically can get your scores up from wherever they were, maybe the mid 500s to the mid 600s. So it's a pretty good jump. And on top of that increase in your credit scores, now you have that emergency fund of whatever money that you borrowed. Yeah, that's pretty handy. And beyond these tools that can help people who have credit that's not in the best shape, general credit management tactics will also work here.

And that includes things like using credit sparingly, like trying to keep your credit utilization under 10% of your available credit. Additionally, make sure that you are making all of your payments on time. That is one of the most important factors when it comes to your credit score. Yes. And you don't want to risk doing any further damage to your credit scores. And that's why you make sure that all of your bills get paid on time. If you are forgetful, maybe consider setting up automated payments so that at least like with a credit card, the minimum payment is being paid every month. So you're not risking late fees and credit score damage. That's super important. I also want to drop in because people get confused about secured credit cards sometimes. They think that

the money they put down as a deposit is the money that's going to be used to pay off their bill over time. And that's not true. If you don't make those monthly payments on a secured card, you're doing further damage to your score. So you definitely want to make those payments. And Sean, as you said, that part about credit utilization is really big. When you have a very small credit limit, like, I don't know, $1,000, it can seem pretty restrictive to only use $100 of that limit. But really, that is going to be helping accelerate the improvement in your scores. You're not using these credit cards for convenience. You really are using them for one end, and that's to improve your credit. And over time, they will improve, but you really have to be careful about how you're handling your credit going forward. And it really can be

incredible how much your credit score can change from even one week to the next, depending on your utilization. For example, I have a friend who recently paid off a fairly large amount of credit card debt, and their credit score went up over 100 points from one week to the next just by wiping out that balance. So that really goes to show how much utilization can fluctuate and have an impact on your credit score. I once had a credit scoring expert tell me that bankruptcy was essentially the worst single thing that you could do to your credit scores. And the impact is fairly lasting. But again, nothing lasts forever. This mark is going to fall off your credit report after 10 years at the longest. And in the meantime, you can do a lot to improve your situation and improve your scores. That also reminds me that it's

important for folks to make sure that these negative marks do fall off their credit report when they're supposed to. That should be automatic, but it doesn't always happen like that. So that's another reason why it's a good idea to regularly review your credit report to make sure things like this are following the timeline they were supposed to be included in the bankruptcy filing should reflect that. When you look at your credit report, if there's an account that doesn't say included in bankruptcy, that's something to definitely follow up on. All right. And with that, let's get on to our takeaway tips. Liz, will you please start us off? Yes. First, know what you're dealing with. Negative marks on your credit report can linger for many years, but their impact on your scores will fade over time. Next, go the extra mile. To get approved for a loan or an apartment after filing bankruptcy, you might need to work directly with a potential creditor or landlord and maybe rope in a co-signer too. Finally, follow best practices. You might want to use a secured credit card or credit builder loan to restore your credit after a big hit and make all those payments on time.

And that's all we have for this episode. Do you have a money question of your own? Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate, and review us wherever you're getting this podcast. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This episode was produced by Liz Weston and myself, audio wizard Kaylee Monaghan

mixed our audio, and a big thank you to the folks on the NerdWallet copy desk for all of their help. And with that said, until next time, turn to the nerds!