Q: How soon can you get an unsecured credit card after bankruptcy? I’m a few months out and want to rebuild my credit and get one that’s unsecured as soon as possible.
A:Obtaining an unsecured credit card after a bankruptcy is definitely an uphill battle, but it’s not impossible. There are a few things to keep in mind:
- Don’t randomly apply, instead use this strategy
Every time you apply for credit (of any form) something called an “inquiry” is recorded on your credit report, information maintained with the credit rating agencies. Having too many of those inquiries can negatively affect your score (until 12 months later, when they are no longer counted in FICO’s scoring model). So, to minimize the number of inquiries made you need to be strategic and NOT randomly apply for cards. Your best best is to check first if you are matched for any offers. There is only one issuer that I’m aware of that let’s you do this.
- Be realistic with your expectations in today’s credit environment
Yes, it’s been almost 8 years since “the great recession” but that doesn’t mean banks went back to doing business like they used to (giving credit to anyone with a pulse). Creditworthiness has to be proven now more than ever. An unsecured credit card after bankruptcy discharge probably won’t happen immediately. You’ll likely have to start with a secured card for at least a little while, but some are a lot better than others (which we’ll discuss in a moment).
- Don’t use a high percentage of your credit limit
Whether you end up getting a secured or unsecured credit card, don’t use a high percentage of your credit limit. Why? Because a part of your FICO score is the credit utilization ratio (what percentage of your credit limits you use). Most people wrongly assume that the more they spend, the better… that’s not how it works.No one knows the magic ratio since that information is FICO’s secret, but the consensus is that using more than 10 percent to 30 percent of your credit limit at any given time will negatively impact your score. So spending above 30 percent of your credit limit should be avoided. Keep in mind that even if you pay your balance in full every single month, the amount reported to the credit bureaus is the balance listed when your billing cycle closes (before your payment is made).
- Avoid borrowers that were part of your bankruptcy
Example: If a Bank of America credit card was part of your chapter 7 or chapter 13 bankruptcy filing and they lost out on thousands of dollars, the last thing you want to do blindly apply an unsecured credit card afterward (or at least not for quite some time). As a general rule, when you’re in the early stages of rebuilding your credit it’s probably best to stick with banks that were not left holding the bag in your bankruptcy filing. For example, I’ve heard American Express won’t ever give you another card if you failed to pay them back in the past and sought protection through bankruptcy.
How to get an unsecured credit card?
As mentioned, getting one right after a bankruptcy discharge probably won’t happen. You will likely have to start out with a secured card and then transition to an unsecured card.
- If you are less than 18 months out it’s going to be difficult to get an unsecured account. And if you’re at this stage, you don’t want to just randomly start applying for unsecured cards and hoping for the best, because each credit application results in a hard pull inquiry (a credit check) which can adversely impact your score for up to 12 months. Being that you’re already at the bottom, the negative effect on your score may seem trivial. But still, it’s best to avoid that, right? This is why I recommend you check out this affordable secured card if you fall under this category.
- If you are more than 18 months out, your chances of getting approved for a basic unsecured account are better (although you may have to wait until approximately 24 months have passed since your filing). When I say “basic” I’m talking about a no-frills credit card without a rewards program (and you don’t see a lot of those nowadays). You can view the best ones here.
Something to keep in mind: If you get an unsecured card… great! If you get a secured card… that’s also great! Either type will work just fine credit building purposes, assuming you use it responsibly and the account reports to all three credit bureaus. Once you start building your credit back new and better card opportunities will open up.
This article was written or last updated January 2016