Sometimes when you get over your head in debt, bankruptcy is simply the best solution to begin getting your finances back on track. However, bankruptcy also leaves a giant blotch on your credit. It screams to lenders that if they loan you money, there’s a good chance they won’t get their money back.
If you ever want to be able to borrow money at a reasonable interest rate again, you need to rebuild your credit. Or in other words, you need to demonstrate to lenders that your bankruptcy was a lifeline from financial straights that you never intend to land in again. You need to demonstrate that you can be trusted with borrowed money. One of the best ways to do this is by using a credit card responsibly.
How a Credit Card Can Help Build Credit
A credit card is essentially an ongoing loan, which you are constantly borrowing against and paying off. This is also known as revolving credit. This gives you the opportunity to demonstrate your creditworthiness month in and month out by paying your bill on time, without having to constantly re-apply for loans. Better yet, if you pay off your card in full each month, you can rebuild your credit without spending a dime on un-necessary interest.
If you have any credit cards that have survived your bankruptcy, great! Continue to use these responsibly. Charge regular expenses (that you know you can afford). Pay them on time each month. This kind of use will gradually counterbalance the negative effect of your bankruptcy, lifting your credit in the process. However, more than likely, all your credit cards have been closed in the bankruptcy process. In this case, you’d need to get another credit card in order to use it to build your score.
Qualifying for a Credit Card after a Bankruptcy
As you may have already found out, however, qualifying for a credit card after a bankruptcy is not all that easy, for the same reason that lenders are hesitant to grant any other types of loans. They are worried that because you filed bankruptcy once, you are also much more likely to not pay off future debt. Because of this, many credit cards are restricted to applicants with good or great credit: typically scores above 690.
Enter the secured credit card. With a secured card, you put a deposit down in return for the card company extending you credit. Especially if your bankruptcy is fresh in your history and your score is still very low, often the credit limit on your card will be equal to the deposit you set down, so really the card company is not loaning you any money at all. However, from that point on, the card functions as a normal credit card, including the card company reporting all your on-time payments (as well as your late payments) to the credit bureaus.
Our Top Two Picks
There are dozens of secured cards, and even a handful of unsecured cards for people with low credit. However, two stand out from the rest: Discover It Secured Card and and Capital One Secured Mastercard. Most importantly, Neither of these have regular maintenance fees. The last thing you need when recovering from a bankruptcy is an annual or monthly fee. Both of these also come with $0 fraud liability policies, meaning that you won’t be on the hook if someone uses your card or card number fraudulently. As an extra bonus, the Discover It earns between 1-2% cashback, depending on the category.
The Discover It Secured and the Capital One Secured also periodically review your credit to see if you’re eligible for an upgrade. The Capital One Secured Card guarantees that as long as you make your first 5 payments on time, you’ll be eligible for a credit line increase (without requiring a further deposit). The Discover It will automatically upgrade you to an unsecured card once you’re eligible, meaning you get your initial deposit back. The Capital One deposit is also refundable, but you may have to request to be transitioned to an unsecured card once eligible.
Things to Watch For in Other Cards
As mentioned, there are dozens of cards available to people with low or fair credit. Be wary tho. You may be tempted by an unsecured card. However, in most cases, these have an annual fee which will in time surpass your refundable deposit on a secured card. Also, be wary of cards from lesser known card companies. Some (but not all) of these smaller companies are notorious for poor customer service, often costing you money because of ‘errors’ on their end. If you do opt for a different card, be sure to check both reviews around the web and the BBB’s profile for the company.
One Final Warning
One final note: while using a credit card can be a great way to rebuild credit after a bankruptcy, this is only the case if you use your card responsibly. Only charge what you can afford and have budgeted, and always pay your bill on time, preferably in full. Not doing this will only further ruin your credit and finances and may even put you on track for another bankruptcy.