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Why It’s Smart To Get a Credit Card After Bankruptcy

TLDR

What You Need To Know

  • Bankruptcy doesn’t have to be the end of your financial freedom
  • Being proactive about rebuilding your credit is a vital step in regaining financial stability
  • A credit card can be a useful tool during this process

Contents

There’s nothing easy about declaring bankruptcy.

From the stress that precedes the decision to the restrictions that come after, it’s a long road for both your financial and emotional health.

Then there’s the damage done to your credit. It’ll likely take years to recover.

But a bankruptcy doesn’t have to be a life sentence: Here’s how to start improving your credit scores today.

How Long Does Bankruptcy Stay on Your Credit Reports?

A Chapter 13 bankruptcy can stay on your credit reports for up to 7 years. Meanwhile, a Chapter 7 bankruptcy can stay on your reports for as long as 10 years.

But, while a bankruptcy might impact your credit reports for a decade, you don’t need to wait that long to rebuild your credit.

What 3 Steps Can You Take To Rebuild Your Credit After Bankruptcy?

bankruptcy in the first place. Once you understand the problems or mistakes that lead to your current situation, you’ll be better prepared to repair your credit history and financial habits.

1. Evaluate your financial habits

The first step? Take a good, hard look at why you had to file bankruptcy in the first place.

Though bankruptcy is sometimes unavoidable, we all have financial habits we could improve (or lose altogether). Whether it’s forgoing shopping, purchasing health insurance, or building up an emergency fund, consider what you should do to avoid going bankrupt again. And, if you haven’t already taken your debtor education course, look at it as a learning opportunity rather than just a legal obligation. By taking this course seriously, you’ll learn skills — such as budgeting and using credit wisely — that can help you avoid financial trouble in the future.

2. Check your credit reports

Next, you should pull your credit reports from the three major credit bureaus — Experian™, TransUnion®, and Equifax®. You’ll need to verify that the accounts included in your bankruptcy are all reporting accurate information on your credit reports. (You can get one free report per bureau every 12 months at AnnualCreditReport.com.)

Accounts included in your bankruptcy don’t have to be deleted from your credit reports. However, they should indicate they were “included in bankruptcy” and should show no balances, past due amounts, or late payments after the bankruptcy filing or discharge date.

Since you’ll need to wait for your credit reports to update, here’s when to check:

  • Chapter 7 bankruptcy: 90 days after your bankruptcy filing date
  • Chapter 13 bankruptcy: 90 days after your bankruptcy discharge (which can take three to five years from the filing date)

If you come across errors on your credit reports, you’ll need to dispute them directly with the credit reporting agencies. You should wait to apply for new credit until they’re cleared up, as credit errors could make it difficult to qualify for new loans or credit cards (or at least difficult to qualify for a good rate and terms).

3. Add new credit

Though you might be wary of credit after bankruptcy, the best way to start rebuilding your credit after bankruptcy is to get back on the horse. New and positive uses of credit won’t erase your bankruptcy, but they may help offset its negative damage.

Here are a few easy strategies you can use to try to boost your credit if you currently have low scores:

  • Become an authorized user: If your family members have well-managed credit cards, you could ask them to add you as an authorized user — with or without ever giving you a physical card. As long as the credit card account is used responsibly, it should add a new record of on-time payments to your credit reports if and when the card issuer reports the authorized user account to the credit bureaus.
  • Apply for a credit builder loan: Available from companies like Self (formerly known as Self Lender), these loans operate a little differently than traditional personal loans. Instead of giving you the money you borrow upfront, the lender holds onto your loan proceeds until you make your final loan payment. Your payments are often reported to the credit bureaus (depending on the lender), and may help you establish some positive credit history.

Then, when you’re ready, it’s time to apply for a new credit card.

How Do I Get a Credit Card After Bankruptcy?

When you apply for a credit card after bankruptcy, you’ll most likely start with a secured card.

As opposed to a typical (unsecured) credit card, secured cards require a deposit, which will usually serve as your credit limit. If you put down a $500 deposit, for example, you’ll typically only be able to spend $500 on the card before it’s maxed out.

Secured cards generally come with fees and high interest rates, and most don’t offer rewards like points or cash back. But they can still be a great way to build your credit. Unlike prepaid debit cards, most secured cards report your payments to the credit bureaus.

Applying for credit cards does have the potential to hurt your credit scores, albeit usually only slightly. So, you should be selective about which card you apply for — and make sure you have a good chance of getting approved.

To get an idea of which cards might be a good fit for you, check your credit scores and look for pre-qualified credit card offers in the mail or online. And, before filling out a credit card application, read the fine print to ensure the credit card issuer doesn’t have any restrictions when it comes to bankruptcies.

What Are the Best Credit Cards To Get After Bankruptcy?

Our advice is to look for a credit card with low or no annual fees, and once you’ve been approved for the card, avoid interest by paying your bill in full each month. Above all, pay your bill on time, every time.

You should also check how many credit bureaus the card issuer reports to — the more the better. The major credit card issuers will report your card activity to all three bureaus. (If a card issuer doesn’t report to any credit bureaus, don’t bother applying, as it won’t help you build credit.)

If you have no luck with credit cards, you can consider cards that don’t require a credit check. We do not recommend no credit check credit cards because they generally have high fees and bad reviews for poor customer service. But if you can’t get approved for any secured cards and you can’t become an authorized user on someone else’s account, we recommend paying your balance in full well ahead of the due date then. Some consumer complaints revolve around payment processing time — so don’t wait until the last minute.

How Do I Avoid Bankruptcy in the Future?

Opening a new credit card is only one piece of the puzzle when it comes to rebuilding credit.

To make sure you don’t fall into credit card debt or bankruptcy again, you need to develop responsible credit management habits.

Here are three basic rules you should follow during the credit-building process:

  • Make on-time, in-full payments each month: Set up autopay or create calendar reminders. By paying your balance in full each month, you can completely avoid interest charges on purchases with most credit cards.
  • Monitor your balances carefully: For the best results, limit your credit card balances to 10% of your available credit.

Limit your credit applications: Open new accounts gradually — and only as needed.

Don’t Wait 7 – 10 Years To Improve Your Credit

Follow the guidelines above, work on building good financial habits, and, little by little, you’ll bring your credit — and your life — back to where you want it.

ICYMI

In Case You Missed It

  1. A Chapter 13 bankruptcy can stay on your credit reports for up to 7 year

  2. When you apply for a credit card after bankruptcy, you’ll most likely start with a secured card

  3. Keep your revolving credit usage low and pay off the balance each month

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