Filing bankruptcy, whether it’s because of credit card debt, medical bills or a job loss, can leave your credit in ruins.
The good news is that you can rebuild – and getting new cards (and treating them responsibly) can help.
Why wouldn’t you just go cold turkey?
It might seem odd to recommend getting a card to those with a fresh bankruptcy. However, you’ll probably need good credit in your post-bankruptcy life – for a mortgage or a car loan, for example. And a good score requires demonstrating you can use credit responsibly.
“When you want to rebuild credit post-bankruptcy, you don’t want to hide from credit,” says Paul Kuzmickas, a bankruptcy attorney at Luftman, Heck & Associates and bankruptcy and business law professor at Cuyahoga Community College in Cleveland, Ohio. “It does you no good at all if you don’t use any [credit]. You’re not rebuilding your credit score. It’s just sitting there.”
The good news is, while your bankruptcy will remain on your report for years (10 years for Chapter 7, seven years for Chapter 13), credit-scoring algorithms and lenders value new information greatly. So, as your bankruptcy fades into your past, expect fresh information (preferably accounts you’re paying on time) to become more prevalent.
“You may have done a lot of bad things two years ago and a lot of good things in the two years since,” Kuzmickas says. “They definitely look at that [newer information] closely.”
Will a bank actually give me a credit card?
Now you know credit cards are a good way to rebuild. But will banks actually do business with you if you have a troubled reputation?
They almost certainly will, Kuzmickas says.
“In fact, many people are getting bombarded with credit card offers as soon as they get their discharge,” he says.
You’re allowed to file for Chapter 7 bankruptcy only once every eight years. So the banks know you won’t easily be able to discharge any debt you rack up post-bankruptcy, Kuzmickas says.
Which cards should I apply for?
Each time you apply for a credit card, you’ll trigger a hard inquiry which will temporarily lower your credit score. That means you want as few swings-and-misses as possible.
“One thing you don’t want to do is fall into that trap where you’re applying for all sorts of credit and getting denied,” Kuzmickas says.
Kuzmickas recommends sifting through any post-bankruptcy offers you’ve been getting in the mail and picking a card with no annual fee. You have a good chance of getting approved for pre-approved offers, because the issuer already checked your credit and determined you worthy of the card. The offers might not be the best and may involve cards with high interest rates and even annual fees, so be sure to compare all offers and select the best you can find.
You might also consider using a pre-approved offers search tool like the Capital One Card Finder Tool or CardMatch, which perform a soft (non-damaging) credit pull and generate offers you might be eligible for.
Store cards, which are known to be easier to get (and which generally offer low credit limits) could be another good place to start.
“If you’re not approved for anything and things are really bleak, that’s when you look for a secured card,” Kuzmickas says.
Secured cards require you to put a deposit down to secure the credit line. Once you’ve proven yourself able to make on-time payments and are eligible for a better card, you can close your card and get your deposit refunded.
Oh, and don’t apply for a card with an issuer involved in your bankruptcy. You may be blacklisted.
“They’re less likely to approve you if they just erased your debt,” Kuzmickas says.
Cards after bankruptcy — what you may qualify for
|Cards you've been pre-approved for||Check your mail for card offers. Or use a soft-pull tool like CardMatch.|
|Store cards||Store cards tend to be easier to get and come with small limits.|
|Secured cards||If you don't qualify for either of the above, a secured card will allow you to deposit your credit limit in advance, increasing your chance of approval.|
Using your first post-bankruptcy card to build credit
The following advice will help you make your new card the first brick in your credit re-building journey:
Pay in full
Any card you get after bankruptcy is going to have a “scary” interest rate, Kuzmickas says. If you let interest charges pile up, you could find yourself back in late-payment land in no time. However, if you pay by the due date, no interest charges will be incurred.
“You could have a 24 percent interest rate, but it doesn’t matter, if you pay in full,” Kuzmickas says. “Don’t just pay the minimum. Pay it off.”
Don’t use up your entire credit limit
Credit utilization (how much of your available credit you use) has a huge impact on your credit score. After bankruptcy, keeping your utilization low can be especially challenging because banks won’t trust you with a large credit line. However, for the sake of your score, it’s vital to keep your credit utilization below 30 percent.
“When you get these first cards, you may have a very small limit available,” Kuzmickas says.
So, instead of using your card to make lots of purchases, make just one small purchase a month and pay it off in full.
“You pay $25 to put gas in your car, the bill comes and you pay it off,” Kuzmickas says.
This post was written or last updated August 2, 2016