Credit Cards After Bankruptcy

Credit cards after bankruptcy

By Janet Berry-Johnson, CPA

After filing for bankruptcy, you need to be proactive about rebuilding your credit. A credit card can be a useful tool for this process, but some people with a history of bankruptcy have a hard time getting approved – even if they can put a security deposit down on a secured credit card.

Does this mean you’ll never enjoy the convenience of a credit card again? Not necessarily.

In this guide, you’ll learn how to get credit cards after bankruptcy and other options you might consider for rebuilding your financial stability.

Getting approved for credit cards after bankruptcy

Is it possible to get approved for a credit card after bankruptcy? Absolutely, according to Marshall Slayton, Managing Attorney and Owner of Slayton Law, PLC of Charlottesville, VA.

“Contrary to popular belief, after bankruptcy, many of my clients are inundated with credit card offers,” Slayton says.

Technically, you can start applying for credit cards as soon as your bankruptcy is discharged.

That usually takes around three months from the filing date for Chapter 7 bankruptcies. Chapter 13 bankruptcies take longer because they involve repayment plans that can take anywhere from three to five years to complete.

Still, just because you can get approved for bankruptcy-friendly credit cards quickly doesn’t mean you should accept any credit offer you receive.

“The vast majority of the offers are terrible deals with predatory interest rates,” Slayton says. “I counsel my clients to throw them in the trash.”

If you’re not getting pre-approved offers or getting turned down when applying for a credit card after bankruptcy, check your credit report.

Don Petersen, a consumer lawyer with the Law Office of Donald E. Petersen in Orlando, FL, says your ability to get credit after bankruptcy depends on a lot of factors, including:

1 - Your credit score before the bankruptcy.

“The higher your credit score was before you filed bankruptcy, the higher your credit score will be after bankruptcy – although still lower than it was before you filed,” Petersen says.

2 - Whether you filed a Chapter 7 or Chapter 13 bankruptcy.

Petersen says:

“If you received a discharge under a Chapter 13 repayment plan, you’re typically able to reestablish credit very soon after receiving your discharge.”

3 - Whether you reaffirmed secured debt.

“If you reaffirmed secured debts such as a car loan or mortgage, you can restore your credit much quicker than someone who did not reaffirm such debts,” Petersen says.

While a bankruptcy will remain on your credit report for seven to 10 years, the discharged debts are supposed to be removed from your credit report. But that doesn’t always happen.

“Many creditors sell discharged debts and continue to leave balances, including charge off amounts and past due balances, on a consumer’s credit report,” Petersen says.

Review your credit report to be safe

Around 60 to 90 days after receiving your Order of Discharge confirming you are no longer responsible for paying back the debts that were discharged in your bankruptcy case, order a copy of your credit report from annualcreditreport.com.

Review the reports to ensure that the balance on all discharged debts is zero.

If any of your creditors are still showing a balance, you’ll need to dispute the report with the credit reporting agency: Experian, Equifax, or TransUnion. The FTC has a sample letter for disputing errors on your credit report that can help.

You might want to send a copy of the dispute letter to the creditor who is reporting inaccurate information as well as the credit reporting agency. The credit reporting agency then has 30 days to investigate the items in question. The credit reporting agency will then send you the results of their investigation in writing. They’ll also send you a free copy of your credit report if the dispute results in a change to your file.

Even if you checked your credit report a couple months after bankruptcy, Petersen recommends continuing to monitor it. Incorrect information can reappear – sometimes even years after the bankruptcy court discharged the debt.

Which credit cards can you get after bankruptcy?

After you’ve ensured your credit report is accurate, it should be a little easier to get approved for a credit card. Still, you likely won’t be approved for an unsecured credit card with low rates, no annual fee, and generous rewards.

Slayton recommends looking for a secured credit card with a low interest rate and low or no annual fee.

The interest rate on a secured credit card is typically lower than the rate charged on subprime cards that are designed for people with bad credit. This is because you have to give the credit card issuer cash to hold as collateral in exchange for the line of credit.

“The key,” Slayton says, “is to find a secured card that also reports to the three major credit reporting agencies. This is important so that you can demonstrate to other potential creditors that you’re making regular and timely monthly payments, which will, in turn, improve your credit score and allow you to get more credit with more favorable terms in the future.”

For example, the Self Visa® Credit Card uses the savings you’ve built up with a Credit Builder Account as a security deposit and reports to the credit reporting agencies monthly. There’s no hard pull on your credit either.

As long as you monitor your spending activity and make on-time and in-full payments, it can be an excellent tool for rebuilding credit after bankruptcy.

Using credit cards post-bankruptcy

Bankruptcy is designed to give you a fresh start with your finances. So you want to make sure you take advantage of this opportunity by using credit cards responsibly going forward.

Here are three ways to use your credit card responsibly post-bankruptcy:

1 - Avoid credit card debt

Credit cards allow you to spend money you don’t have, which creates more debt. To avoid going into debt again, use your credit card to cover a few small purchases each month, then pay off your balance in full.

By not carrying a balance, you’ll avoid paying interest on your purchases while building credit. Here’s one example.

2 - Avoid using the majority of your available credit

Your credit utilization is an important factor in your credit score, and financial experts recommend keeping your credit utilization ratio under 30% at all times.

That means if you have a credit card with a $1,000 limit, you’ll never charge more than $300 on that card – even if you pay the balance in full each month.

3 - Make on-time payments

Your payment history is one of the most important factors in your credit score. Making on-time payments will help you avoid late fees, penalty interest rates, and negative items on your credit report.

Enroll in automatic payments or payment alerts to ensure you don’t accidentally miss a payment.

Should you apply for a credit card after bankruptcy?

Before filling out a credit card application, consider the reasons you got into financial trouble in the first place.

If your bankruptcy was the result of medical debt, divorce, job loss, or another unforeseen event, a credit card can be a useful tool for rebuilding credit.

However, if you tend to spend outside of your means, you might want to work on budgeting and saving first.

In the meantime, there are other steps you can take to rebuild your credit without a credit card.

Here are three examples. (For a more complete list of ways to build your credit, read our guide here.)

1 - Consider a credit builder loan

A credit builder loan is an installment loan that exists solely to help people build credit.

It works like this:

  1. You apply for a loan at a bank, credit union or through Self.
  2. Instead of receiving the loan proceeds in cash, it’s deposited into a savings account or CD.
  3. You start making monthly payments, and the lender reports those payments to one or more of the three major credit rating agencies, helping to build a positive credit history (if you pay on time each month).
  4. Once you’ve paid the loan in full, you’ll receive the money in the CD or savings account, less any interest or administrative fees.

2 - Build credit with your utility bills

Typically, utility companies and cell phone carriers only report your payment history to the credit rating agencies if you default on your payments or get sent to a collection agency. However, it’s possible to use your on-time bill payments to improve your credit score.

Services such as Experian Boost and eCredable let you link your utility or bank accounts and select the positive payment history you want added to your credit file.

According to Experian, 75% of people with a FICO Score below 680 saw an improvement in their score after adding utility payment information to their report.

3 - Build credit with rental payments

Few lenders and property managers report rental payment history to the credit bureaus, so paying your rent on time usually has no impact on your credit. If you’re currently renting, you can ask your landlord or property manager to report your rental payment data.

If your landlord or property manager collects payments through a rent payment service, you may be able to have your payment history reported to Experian RentBureau.

Read this guide to help you decide if reporting rent to the credit bureaus is worth it.

Bottom line

Bankruptcy has a major impact on your credit and your ability to borrow in the future, but it doesn’t last forever.

By understanding what it takes to qualify and using credit responsibly going forward, you can demonstrate that you’re a responsible borrower. Eventually, the bankruptcy will be less of a factor in your credit history until it’s gone from your file forever.

About the author

Janet Berry-Johnson is a Certified Public Accountant and freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Freshbooks, The Penny Hoarder, and several other major outlets.

Written on September 8, 2020

Self is a venture-backed startup that helps people build credit and savings.
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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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