Filing for bankruptcy can feel like the ultimate catastrophe. Your assets are wiped out, your credit score takes a major blow and lenders no longer want your business. So if you need to get a credit card after a recent bankruptcy, a few challenges stand in your way.
Fortunately, there is light at the end of the tunnel. If you need to get your hands on a credit card following bankruptcy, it's more than possible -- and you won't have to wait years to do it.
Here's how to rebuild your credit after a bankruptcy and get an affordable credit card as soon as possible.
How Bankruptcy Affects Your Credit
While going through the process of bankruptcy, you may be unable to access any type of credit at all. "It effectively freezes all your credit," explains David Roth, owner of Newly Wealth LLC, a company that helps people make financial decisions through low-cost tools, services and guidance. "With few exceptions, you cannot apply [for] or use credit while in the process of bankruptcy."
How long this credit freeze lasts depends on the type of bankruptcy you file:
-- Chapter 7: With Chapter 7 bankruptcy, all your eligible assets are liquidated, and the cash is used to pay back your creditors. This process usually takes four to six months, from initial filing to discharge, according to legal information site Nolo.
-- Chapter 13: If you opt for Chapter 13 bankruptcy, your assets are not liquidated. Rather, you repay your debt over a three- or five-year payment plan that's approved by the court.
Additionally, your credit score will take a hit. Experian notes that a Chapter 7 bankruptcy will remain on your credit report for 10 years following the filing date, while Chapter 13 will remain for seven years. If you had good credit prior to filing for bankruptcy -- a score of 780, for example -- expect to see it fall by as much as 220 to 240 points, according to MyFico.com. A credit score of around 680 will take a slightly smaller hit of 130 to 150 points.
"After the bankruptcy becomes final and is resolved, that frees up your credit," says Roth. At this point, you'll be able to apply for new lines of credit, including credit cards.
Getting a Credit Card After Bankruptcy
With bad credit and a bankruptcy on your record, you might think credit card issuers want nothing to do with you. In reality, it's quite the opposite.
"Since there is a seven-year period where you cannot file for bankruptcy again, a lot of companies are eager to send credit card offers in the mail," explains Roth. But borrower beware: Roth notes that these cards usually come with sky-high APRs, short for annual percentage rates, and very low credit limits. "Depending on your income, the credit line might be as low as $300," he says.
If you do decide to pursue an offer from a credit card company, it's important to look for a card without any unnecessary fees, such as an annual fee. You should also aim to pay off the balance in full every month so you don't incur interest charges.
However, consider taking a step back and rethinking your goal of getting a credit card so fresh out of bankruptcy. Your options will be limited, and you might not be in the ideal financial situation to take on a credit card or other type of revolving credit. Taking the time to rebuild your credit, as well as exploring alternatives to traditional credit cards, can help you borrow money at a lower cost and get back on your feet that much sooner.
Rebuilding Credit After Bankruptcy
Even though bankruptcy is a long-lasting negative mark on your credit report, there are steps you can take right away to start building your credit back up. But you will need patience along the way. "The road to bankruptcy is usually a long one, and unfortunately, so is the road to recovering a great credit score," says Andrea Clark, a personal financial planner and owner of The Table Financial Planning. According to Clark, the key to building good credit is time and new behaviors.
What are those behaviors? With little to no credit at your disposal, you'll need to focus on the things you can do that don't involve taking on debt. And at 35 percent of your FICO score, paying your bills on time is the best way to build good credit over time.
As someone who has recently gone through bankruptcy, you might think that's a tall order. But taking the time to devise a budget -- and sticking to it -- will ensure your payment history shows you've changed your ways. Plus, you'll develop better money habits that will prepare you for the day you do take on a credit card. "Let your budget be a road map for success," says Clark, "assigning a job to every dollar before it is spent."
You should also request copies of your credit reports and make sure you no longer have delinquent accounts that were part of the bankruptcy still being reported after discharge. This will needlessly drag down your credit score. Having the credit report errors corrected will instantly give your credit a boost. You can get a free copy of your credit report from each of the three bureaus once a year by visiting AnnualCreditReport.com.
Alternatives to a Traditional Credit Card
Whether you can't get approved for the credit card you want right now or want to explore other credit-building tools, you have a few options at your disposal.
Authorized user: A simple way to build credit without getting your own credit card is being added as an authorized user on someone else's card. This lets you reap the benefits of their spending activity and positive repayment history without taking on any credit card debt of your own. It's a much lower-risk alternative to asking a family member or friend to co-sign a loan or credit card for you.
Keep in mind that the primary cardholder is responsible for paying the balance, and you are simply authorized to make purchases, so this won't have as great of an impact as owning your own card. Even so, it can be a good start, especially if you have a thin credit file. Just be sure to verify that the card issuer reports authorized users to the credit bureaus.
Secured credit card: An even more effective tool for building credit that offers all the advantages of a traditional credit card is a secured credit card. Rather than borrowing against an unsecured revolving line of credit, you "secure" your credit line with an upfront deposit. This way, if you fail to pay your balance, the card issuer can recoup the money.
The minimum deposit on secured cards is usually about $200 to $500. Your credit line will be equal to or a percentage above that security deposit. Again, it's important to make sure that your activity is reported to the major credit bureaus so you get credit for making on-time payments. And be sure to compare fees -- some secured cards come with exorbitant fees that can eat up your deposit before you ever have the chance to make a purchase.
Credit builder loan: A somewhat newer financial product, credit builder loans are designed specifically for borrowers with poor or no credit who want to build their credit scores. These loans are typically offered in modest amounts of about $300 to $1,000, and the repayment term is usually a year or less, according to the federal Consumer Financial Protection Bureau.
Credit builder loans are often locked in a savings or CD account so that your principal is protected and you earn a small yield by the end of the repayment term. It's also possible to borrow an unsecured credit builder loan, though the lender will likely charge interest and want to see proof that your financial situation is stable.
Should You Get a Credit Card After Bankruptcy?
Going through bankruptcy doesn't make you a failure. It can happen to anyone, especially if a medical emergency, job loss or other financial disaster happens. The road to recovery is not as difficult as it might seem at first.
Even though a bankruptcy stays on your record for the better part of a decade, its negative impact will fade with time. If you continue to pay your bills on time and use credit responsibly and sparingly, you'll see your credit improve. The opportunities to get low-interest credit cards with generous rewards will increase along with your credit score -- just remain persistent.
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