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If you have ever been through a bankruptcy, you know that the process of rebuilding your credit can seem slow, almost glacial, at times. Depending on which chapter of bankruptcy you filed for, you will be reminded of your bankruptcy for the next seven to 10 years every time you check your credit report (more on the importance of regularly checking your credit below).
But it’s important to remind yourself that you have not ruined your credit. You’ve damaged it, there’s no denying it. But it just needs to be rebuilt. And nobody loves giving people second chances more than banks and lenders.
In fact, if you play it smart, your once “ruined” credit will actually be in better shape than ever and your financial future more promising than before.
When to Apply for Your First Credit Card After Bankruptcy
The idea that a credible and legitimate bank would give someone fresh from filing bankruptcy a credit card might seem far-fetched, but it is not. Financial institutions know people are forced into bankruptcy every day through no fault of their own.
Medical emergencies, job losses, the economy, natural disasters… all of these outside forces can bring even the most fiscally responsible person to insolvency. Knowing this, they have created special financial products that allow people to reestablish a pattern of healthy borrowing, spending, and repayment.
So what to do now?
First, check your credit reports. It is important, however, that you wait the appropriate amount of time.
If you filed for Chapter 7 bankruptcy, wait 90 to 120 days after your case has been discharged by the court (you’ll receive a letter from the court letting you know).
If you filed for Chapter 13 bankruptcy, you only need to wait 90 to 120 days after the initial bankruptcy filing.
This waiting period allows for the various credit bureaus and court offices to gather all the information and issue your new correct credit reports and score. Lending institutions, like the bank or credit union that will give you your first new credit card, base their decisions on these numbers.
It’s a good idea that you get in the habit of checking your credit reports annually (you can get your free credit reports at AnnualCreditReport.com) and your credit score monthly. Knowing these numbers (as well as the bank or credit union’s underwriting standards) before you apply for a new credit card after bankruptcy is vital in order to rebuild your credit since every application for a credit card or loan prompts a hard inquiry into your credit. You may also want to consider working with a company to help repair your credit after bankruptcy.
Too many inquiries into your credit is seen as risky behavior and can make some lenders wary. If you truly want to rebuild your financial status with an eye on lasting stability, you need to get acquainted with every aspect of your finances. That starts with your credit reports and score.
What Kind of Credit Card Is Available?
As someone fresh from bankruptcy (and, in essence, starting from a fresh slate), you need to prove to lending institutions that you’re once again a safe bet. But how can you do this when you’ve supposedly just admitted to the world that you’re a financial risk?
As mentioned above, banks and credit unions know that life happens. And the truth is, they don’t really care why you had to declare bankruptcy, they just want to know if you’re currently in a position to borrow money and repay that money within a specific timeframe (usually with interest). How they do this is by issuing a secured credit card after bankruptcy.
A secured credit card differs from a regular, mainstream credit card in that you have to put down a security deposit on the card; this amount of money usually becomes your borrowing limit.
Since there is no incentive for a legitimate bank or credit union to lend money to someone who (on paper, at least) does not pay back debts, they want a guarantee they won’t lose money. The way they do this is by having you pay upfront.
For example, say you want a card with a $500 spending limit; you pay the bank or credit union $500, and they issue the card. As long as you make your payments on time (usually with interest), it will begin to show up as a positive on your credit reports.
So why would you do this; what’s in it for you?
Well if you pick the right secured credit card they will report your monthly, on-time payments to all three of the major credit bureaus. This reporting of your monthly payments will have a positive impact on your credit score and you’ll start rebuilding your credit score right away. Make no mistake, a secured credit card is one of the best ways to rebuild your credit after bankruptcy.
Keeping your payments current and full during this period is critical, so be very mindful of how you’re using this card. If you’re gainfully employed and know you’ll be able to cover the payments, it might be tempting to go ahead and use this card with abandon, thinking this will show responsible usage. Which it does, but remember that life happens, and a sudden, unexpected loss of income won’t necessarily be forgiven by your creditors.
The best way to use this card is only for one or two monthly recurring charges, such as your phone bill or gym membership. Link your new card with your checking account and set up auto-pay. This way, your credit card is actively borrowing money that is then being paid back, all without any effort on your part. And as long as there’s money in your checking account, you won’t miss a payment. This simple step will do wonders for your credit.
What Kinds of Secured Credit Cards Are Available?
When it comes to secured credit cards, not all credit unions or banks are equal. Some lenders will require an annual fee just to keep the card open, even if you’re not using it, while others have no fees attached. Another thing to consider before applying for a credit card is what perks are offered. Depending on your wants and needs, it actually might make sense for you to open a card with a high annual fee if the perks you get in return will be of use to you.
For example, if you travel often for work, there are actually secured credit cards that allow you to earn airline miles, usually at the rate of 1 mile per $1 you spend (though each card is different, so be sure to check the details). These cards charge an annual fee of around $25 to $50. So depending on how often you fly, you could actually come out ahead in the deal.
Other cards offer extended auto rental insurance, points redeemable for qualifying purchases (gas, groceries, etc.), and restaurant discounts. Some cards, after you’ve spent and repaid your limit, will actually refund the interest you made on your payments along the way.
But again, get the whole picture before signing up for the card and be realistic about how you will use it, keeping in mind that even one late payment can have a negative impact on your credit, especially in the early stages.
If you want to keep from taking one step forward and two steps back, be sure to make every payment in full and on time. Consider breaking monthly payments into weekly payments if it will help, and it’s a good idea to set calendar reminders on your phone and computer near the time of the month when all the bills come due. Organization many times equals freedom, and that is very much the case here.
Research banks and their offerings with your needs in mind, but a few banks that offer solid secured credit cards are Capital One, OpenSky, and Indigo. If you’re particularly interested in airline miles, check with your preferred airline; many offer their own secure credit cards, usually paying out at the rate of 1 mile per $1 spent.
Always shop around for your credit card and go with one that meets your specific needs. Above all, remember that a secured credit card is designed specifically for folks with bad credit to demonstrate that their financial gears are running smoothly once again. Having one should become an integral part of your personal economic recovery plan.
When to Apply for a Mainstream Credit Card
While there is no set time period of time you need to wait in order to apply for a mainstream credit card after bankruptcy, a good rule of thumb is one year from the time your bankruptcy was discharged or filed (depending on which chapter). This will allow your secure credit card payments enough time to positively impact your credit score.
Again, before applying, be sure to check your most recent credit report as well as the bank’s underwriting standards. Remember that each application process includes a hard inquiry into your credit history and score, and if you’re denied it’s a mark against your credit.
If you don’t think you would qualify for a mainstream credit card after a year, consider asking a family member or close friend if you can become an authorized user of their credit card. As long as they notify their bank or credit union that you will be using the card and making payments, it will reflect positively on your credit reports. You could even do both, hold your own secured credit card and be an authorized user on someone else’s regular card, and improve your credit that much faster.
Thinking About Your Long Term Finances After Bankruptcy
Whether you have a bankruptcy on your credit reports or not, you should keep in mind that most lending institutions (and even the credit bureaus themselves) favor new information over old. That means that as long as your recent credit activity has been uniformly positive, the faster your credit will really begin to regrow, and the sooner you can expect to receive the credit and loans you’ll need to do the things you want, like buying a car after bankruptcy or buying a house after bankruptcy. That’s why it’s so important to know your credit reports and history and why it’s so important to make all payments on time and in full. When applying for loans for higher ticket items like a car or home you will also want to prove your lender with a bankruptcy letter of explanation.
If you find an error on one of your credit reports, be sure to file a complaint with the credit bureau and notify your bank or credit union immediately. Your credit reports and score must be kept up to date and correct at this stage; if there are any discrepancies to be found, even through no fault of your own, banks will notice, and it could reflect poorly on you.
Remember that it is very important in the early stages that you are sure that your financial diligence is paying the dividends it should be. Ensuring that each financial institution is being as careful as you is also, unfortunately, your job.
But think of it like this: studying your credit reports will not only keep you on top of your overall financial picture, it will also be proof positive that your hard work is paying off. And that kind of positive mental attitude in the middle of what can often seem a difficult, almost impossible, task is priceless.
There are many simple things you can do to recover after bankruptcy. Properly applying for and using a secured credit card is one of the safest, easiest, and fastest ways to improve your credit. The key is to have set up a budget after bankruptcy and use your new credit cards strategically. Make your local credit union your first stop, but if you’re not satisfied with what they have to offer, spend an afternoon online. Be sure to find a card that you can not only live with, but a card that will improve your life in more ways than one.