Smart Money Podcast: No-Spend Month 2.0, and Recovering From Credit Damage

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.

This week’s episode starts with a conversation about how to do a no-spend month that will work for you.

Then we pivot to this week’s money question from a listener’s text message:

“Hi, NerdWallet. I have been binging your podcasts 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.”

Check out this episode on any of these platforms:

• Apple Podcasts

• Spotify

Our take on no-spend months

A no-spend month, when you avoid spending money on nonessentials, is what you make of it. Before you commit to the challenge, think about what you want from it. You can focus on changing your spending habits, saving some money — or both. Give yourself some allowances, too. Maybe you’ll meet some friends for happy hour but skip that second cocktail or the appetizer. And find a way to track what you do and don’t spend money on. The Notes app on your phone can be a convenient way to jot down what you want to spend money on throughout the month and how much you’ve saved.

Consider asking a friend to join you for the no-spend-month challenge. A trusted confidant can help keep you accountable as the days go on and you feel tempted to buy things you said you wouldn’t. They can also be your cheerleader in moments when you stick to the rules you set for yourself. If you don’t have a friend to support you through the no-spend challenge, the Smart Money podcast crew is here for you. Share your progress with us by emailing [email protected] or by texting us or leaving us a voicemail on the Nerd hotline at 901-730-6373.

Our take on recovering from credit damage

When your credit takes a hit — whether from a bankruptcy filing or late payment — it can take years to fully recover. The negative mark will linger on your credit reports for between seven and 10 years, depending on what happened. Once the clock has run out, these marks should automatically drop off your credit reports.

But you can take steps to rebuild your credit scores in the meantime. To start, make every payment on time because on-time payments are the single largest factor that influences your credit scores. Also, try to keep your credit utilization below 30%, meaning that you are using less than 30% of your available credit. Credit-builder loans and secured cards can also help you restore your credit over time.

If you have a hard time qualifying for a line of credit or getting approved for an apartment because of your credit history, think about enlisting the help of a trusted family member or friend to co-sign with you. Know that many people will be wary of putting their credit on the line, though.

Our tips

1. Know what you’re dealing with: Negative marks on your credit report can linger for many years, but their impact on your score will fade over time.

2. Go the extra mile: To get approved for a loan or an apartment after filing for bankruptcy, you might need to work directly with a potential creditor or landlord. And maybe rope in a co-signer, too.

3. Follow best practices: To restore your credit after a big hit, you might want to use a secured credit card or credit-builder loan. And make all payments on time.

More about managing credit on NerdWallet:

What Factors Affect Your Credit Scores?

How to Calculate Your Credit Utilization Ratio

What Is a Secured Credit Card? How Is It Different From an Unsecured Card?

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.

Episode transcript

Sean Pyles: Liz, can you believe it? It's one of my favorite times of the year.

Liz Weston: Oh, really? Why is that?

Sean Pyles: Well, as of last week, the IRS is now processing tax returns, which means that the 2023 tax season has officially begun.

Liz Weston: You need professional help, and I'm not talking about a CPA.

Sean Pyles: OK. 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.

Liz Weston: 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.

Sean Pyles: And I'm Sean Pyles. 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.

Liz Weston: 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 [email protected].

Sean Pyles: 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.

Liz Weston: Woo-hoo! We are excited about the weirdest things.

Sean Pyles: Yeah, I know. Well, that is why we are the money nerd people, I suppose.

Liz Weston: Yes.

Sean Pyles: 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 "wants," with the goal of understanding your spending triggers, maybe breaking up your shopping habits and, hopefully, saving some money.

Liz Weston: And it can be really helpful right now. People are still feeling this 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.

Sean Pyles: 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.

Liz Weston: I like that. I like that.

Sean Pyles: Yeah.

Liz Weston: 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?

Sean Pyles: 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.

Liz Weston: So you decided that you're not going to spend money on what for how long?

Sean Pyles: 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.

Liz Weston: Oh, OK.

Sean Pyles: 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'm 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.

Liz Weston: OK. 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?

Sean Pyles: 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, "OK, I need these exact paints to make these botanicals 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.

Liz Weston: That makes a lot of sense.

Sean Pyles: 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?

Liz Weston: Basically, if it's something that's consumable, I'm pretty OK with it. But even then … 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 taking 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 … apps that 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 it is, like you said, is really tempting to be scrolling through all these different listings and fantasizing about what to buy and maybe even bidding 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.

Sean Pyles: 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 just to realize, "OK, these things that I would've just reflexively 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."

Liz Weston: 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 got to have it" cools off, and then you can be a little bit more objective about it.

Sean Pyles: 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.

Liz Weston: 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 it 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 out there who's doing it or share your progress with us.

Sean Pyles: 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 [email protected] and we'll keep this conversation going throughout the month.

Liz Weston: That sounds great.

Sean Pyles: OK. 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 Betz-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.

Liz Weston: And that's a good read, too. To enter for a chance to win our book giveaway, send an email to [email protected] with the words "Book Sweepstakes" in the subject line during the sweepstakes period. Entries must be received by 11:59 p.m. Pacific Standard Time on Feb. 16. 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.

Sean Pyles: All right, now let's get onto this episode's money question segment.

Liz Weston: Let's do it. This episode's money question comes from a listener's text message. Here it is.

Listener: "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."

Sean Pyles: 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.

Liz Weston: 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.

Sean Pyles: So in general, negative marks are going to stay on your credit report for around seven years for most negative marks. Chapter 7 bankruptcy, which it seems like this listener filed, will stay on your credit report for 10 years.

Liz Weston: So our questioner thought it was maybe the most impactful after two years. What's the actual reality there?

Sean Pyles: So here's kind of the tricky thing that's going on in our listener's 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 worst 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 its time on there. It seems like our listener's kind of conflating these two things.

Liz Weston: 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.

Sean Pyles: 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, Liz?

Liz Weston: 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.

Sean Pyles: 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. That 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.

Liz Weston: 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.

Sean Pyles: And if you're really in dire straits and you have someone that you can lean on, you might want to consider getting a co-signer, 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 contract that they would be signing with you.

Liz Weston: Yeah, they'd really have to love you to do that.

Sean Pyles: It may be a little bit risky.

Liz Weston: Yeah, exactly.

Sean Pyles: 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.

Liz Weston: 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.

Sean Pyles: 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?

Liz Weston: 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, a thousand dollars, and you get a card with a thousand dollars credit limit. You make charges, you pay those off, and over time, you typically can turn that into a regular unsecured card.

Sean Pyles: Another option that folks might want to look into are credit-builder loans. Can you explain how those work, Liz?

Liz Weston: Yeah. And actually, this is a better option for many people because they may not have a thousand dollars 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 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.

Sean Pyles: 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.

Liz Weston: 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 the 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 scores. 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, a thousand dollars, it can seem pretty restrictive to only use a hundred dollars 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.

Sean Pyles: 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 a hundred 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.

Liz Weston: 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.

Sean Pyles: 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're supposed to.

Liz Weston: Yeah. And all the accounts that 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.

Sean Pyles: All right, and with that, let's get onto our takeaway tips. Liz, will you please start us off?

Liz Weston: 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.

Sean Pyles: 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 a landlord, and maybe rope in a co-signer, too.

Liz Weston: 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.

Sean Pyles: 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 [email protected]. Visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you're getting this podcast.

Liz Weston: 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.

Sean Pyles: This episode was produced by Liz Weston and myself. Audio wizard Kaely Monahan 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.