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You may not qualify for a conventional credit card soon after filing for bankruptcy, but seeking out cards designed for users with poor credit can be a great way to start rebuilding your credit.
How Bankruptcy Affects Credit
A bankruptcy filing is the most severe negative event that can appear in a credit report, and it can do deep, long-lasting damage to your credit scores.
A Chapter 7 bankruptcy, which eliminates all your debts, stays on your credit report for up to 10 years. A Chapter 13 bankruptcy, which restructures your debts and provides creditors partial repayment, will remain on your credit report for up to seven years.
When you file for bankruptcy, the best your creditors can expect to collect is a fraction of the money you owe them. (In a Chapter 7 filing, creditors may get nothing at all.) It's understandable, then, that bankruptcy typically makes lenders wary of issuing you new credit. Some lenders turn down any credit applicant with a bankruptcy on their credit report. Other lenders will consider applicants with older bankruptcy entries, but typically charge high interest rates and fees because they consider bankruptcy filers risky borrowers.
As long as a bankruptcy appears on your credit reports, it will tend to lower your credit scores. But its impact on your scores will diminish over time. Credit scoring models such as those from FICO and VantageScore® give new information greater weight than older information, so adopting good credit habits can help you start rebuilding your credit scores, even immediately after you've filed for bankruptcy.
Key steps to improving credit scores, after bankruptcy or under any other circumstances, include avoiding excessive debt and high card balances and, most importantly, establishing a record of steady, on-time debt payments on your credit reports. So how do you rack up steady payments if bankruptcy has made lenders reluctant to work with you? The key is to focus on credit cards for people with less-than-ideal credit, or even cards that require no credit at all.
Getting a Credit Card After Bankruptcy
Your first step toward getting a credit card after bankruptcy should be checking your credit report and credit score so you know where you stand when researching various cards' approval requirements. If, like many others who file for bankruptcy, you have credit reports that include late or missed debt payments, maxed-out credit cards, or accounts that have been turned over to collections agencies, your credit scores may have dropped into the fair or poor credit range even before taking a hit from the bankruptcy. While that may make it tough to get a conventional credit card or loan, there are strategies that can help you start rebuilding credit following a bankruptcy.
When looking for the right credit card, your best bet will likely be a secured credit card, which requires you to put down a cash deposit. The deposit amount typically equals the card's borrowing limit, and if you fail to pay your card balance as agreed, the card issuer can take your deposit to cover the debt. Otherwise, a secured card works the same as a conventional card: You can make purchases up to the borrowing limit, repay them over time as long as you make a minimum monthly payment, and you'll be charged interest on any unpaid balance you carry forward month to month.
Secured cards you may be able to qualify for after a bankruptcy discharge include:
- The Merrick Bank Double Your Line® Secured Visa® Card assigns you a $200 borrowing limit when you put down a $200 deposit. The variable interest rate is 17.45%, and the card has an annual fee of $36. If you make seven months of on-time payments, Merrick Bank automatically raises the card's borrowing limit to $400, without requiring an additional deposit.
- The Capital One Platinum Secured Credit Card assigns you a $200 borrowing limit when you put down a refundable deposit starting at $49. The card charges no annual fee and has a variable interest rate of 26.99%. You'll automatically be considered for a higher credit line with no additional deposit in as little as six months.
The chief advantage of secured cards is that they usually have lower interest rates and fees than unsecured cards designed for people with poor credit. The main disadvantage of secured cards is low borrowing limits that restrict the types of purchases you can make. But when you're rebuilding credit after bankruptcy, that can also be seen as an advantage: Low spending limits can make it relatively easy to pay your balance in full each month.
Borrowing limits on unsecured cards for users with poor credit tend to be low as well. The chief advantage of unsecured cards is that they don't tie up any of your cash in the form of a deposit—and if you can manage to keep balances low enough to pay off in full every month, you'll avoid interest charges, so their high interest rates won't matter much.
Examples of unsecured cards available to individuals with credit scores of 579 or lower include:
- The Destiny® Mastercard® from Genesis FS Card Services offers a $300 borrowing limit with no deposit at an annual interest rate of 24.90%, and charges an annual fee of $75 the first year ($99 thereafter).
- The Total Visa® Unsecured Credit Card issued by the Bank of Missouri offers a $300 borrowing limit with no deposit, at an annual interest rate of 34.99%. The card charges an $89 program fee, a $75 annual fee for the first year ($48 thereafter), and a monthly maintenance fee of $6.25 after the first year.
- The Milestone® Gold Mastercard® from Genesis FS Card Services offers borrowing limits of $300 and up, at an interest rate of 24.90%. The annual fee ranges from $35 for the most qualified applicants to $75 for the first year (and $99 thereafter) for qualifying applicants with the poorest credit. The card's borrowing limit and annual fee aren't set until you've applied.
Tips for Using Credit Cards After Bankruptcy
Bankruptcy is a painful process but can be a meaningful way to gain a clean slate on your finances and a chance to rework your approach to credit management. If you resolve to keep credit purchases at a level you can pay off quickly, and avoid excessive debt, your credit standing and credit scores should gradually but steadily improve. Paying your credit card balance in full every month will also help you avoid interest charges and costly late fees.
Even more important is to pay your credit card bills on time. Payment history is the most significant factor that determines your FICO® Score☉ , so steady on-time payments will help increase your score, while late or missed payments can seriously lower them.
Most credit card issuers offer tools to help you avoid late payments, such as email and text alerts, and the ability to schedule automatic payments every month. Taking advantage of these tools, or using any other method that reminds you to pay your bills on time—smartphone reminders, sticky notes, a desk calendar—can be vital to rebuilding credit after bankruptcy.
How to Build Credit After Bankruptcy
Once your bankruptcy is discharged and you've opened a new credit account that you manage responsibly, there are still other steps you can take to help rebuild your credit after bankruptcy:
Become an authorized user. If you don't qualify for an unsecured credit card, and cannot afford a secured card, you may be able to begin accumulating a positive payment history as an authorized user on a friend's or family member's credit card account. The account will appear on your credit reports, but the primary cardholder is responsible for making payments to the card issuer. If the primary user has stellar credit and makes all payments on time, your credit scores are likely to improve; if the primary user has a record of late payments or a large amount of debt, however, that won't do your scores any good.
Consider a credit-builder loan. These are small personal loans, most commonly offered by credit unions, specifically designed to help people improve their credit. The financial institution issues you a small loan—typically a few hundred dollars or up to $1,000—and places that sum in a special interest-bearing savings account in your name. You cannot touch that money until you pay off the loan in full, by making regular monthly payments, typically for a period of no more than 12 months.
When you've paid off the loan (with interest), the money in the savings account is yours. Assuming you make all your payments on time, you'll have accumulated a series of positive payment entries on your credit reports, which will tend to increase your credit scores. If you're considering a credit-builder loan, make sure the lender reports payments to all three credit bureaus (Experian, TransUnion and Equifax) so your positive payment history benefits all your credit reports.
Monitor your credit reports and credit scores. Checking your credit as it improves can help motivate you to keep managing your finances responsibly. In addition, it can also alert you to suspicious activity on your credit accounts—a possible warning sign of fraud and identity theft.
You can check your credit reports from all three credit bureaus for free at AnnualCreditReport.com. You can also sign up for free credit monitoring with Experian, which allows you to check your Experian credit report and FICO® Score, as well as get alerts when any suspicious activity appears on your report.
Bankruptcy is a major event that can have negative consequences for many years, but millions have successfully moved past it, and you can too. If you obtain credit as soon as possible after your bankruptcy and take care to use it wisely, you can begin rebuilding your credit quickly, and get back on your feet sooner than you might imagine.