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Credit cards after bankruptcy

how soon after bankruptcy can i get a credit card

There may be a few complications when applying for a credit card after bankruptcy, but it may be possible. You might be surprised by the stepping stones available to you from credit card companies for rebuilding credit. A bankruptcy filing, while undesirable, is set up for the possibility of complete financial recovery. 

Filing for bankruptcy is not something anyone plans to do, but there are circumstances where it is the only way forward. In 2023, Personal and business bankruptcy filings rose 10% compared to the previous year.1 

How Bankruptcy Works

Bankruptcy plays an essential role in the American economy. There must be a way for debts to be discharged when there is positively no way for them to be repaid in full according to the previously stipulated terms. While bankruptcy should be avoided to the best of your ability, there are times when it is the best possible option to move forward. 

Bankruptcy offers a clean slate, whether through full discharge or debt settlement. How bankruptcy works depends on which chapter of bankruptcy one files. There are two types of bankruptcy individuals can file: 

  1. Chapter 7 Bankruptcy

Chapter 7 bankruptcy is what most people think of when they think of bankruptcy. All the balances of what you owe from credit cards to installment loans such as personal loan options, with exceptions, are fully discharged. The exceptions to full discharge are minimal and include alimony, child support, taxes, and student loans.

The discharging of your debts could include selling some of your assets, including property. After Chapter 7 bankruptcy is fully settled, all your debts will be fully discharged apart from the exceptions listed above. 

  1. Chapter 13 Bankruptcy

Chapter 13 bankruptcy restructures your debt, settling it through a repayment plan over three to five years. Whatever is remaining through the restructuring process will be forgiven and discharged. This type of bankruptcy is a bit gentler on your credit score and history since you still pay a portion of your debt to your creditors.

Paying a portion of your debt through restructuring and a payment plan will enable you to hold onto your assets that might have otherwise been sold off through a Chapter 7 bankruptcy. Additionally, Chapter 13 bankruptcy falls off your credit a few years sooner than Chapter 7. Once bankruptcy falls off, you will likely see an increase in your credit score

How Filing for Bankruptcy Affects Your Credit

The three major credit bureaus are:

  1. Transunion
  2. Experian
  3. Equifax

These agencies have credit reports for consumers which include personal details, account information, credit inquiries, collections, and public records. The three credit bureaus pull public records from state and county courts. These public records include foreclosures, repossessions, and personal bankruptcies. 

Bankruptcy will show as a negative mark on all your reports that will impact how potential future lenders view you. 

A recent bankruptcy in your credit profile will cause many creditors, lenders, and landlords to decline your applications for loans, credit card options, and apartments. Those creditors who are willing to approve you may charge a higher interest rate and less favorable terms. 

The potency of bankruptcy’s negative effect on your credit report will fade as time passes, and you will be able to eventually qualify for more favorable credit opportunities. If you put a solid effort into rebuilding credit after you file bankruptcy, your credit score will steadily increase, lessening the impact of the derogatory mark on your credit report. 

How Long Does Bankruptcy Stay on Your Credit Report?

How long bankruptcy will remain on your credit reports depends on which chapter of bankruptcy you file. Chapter 7 bankruptcy will stay on your reports for ten years after the filing date. Chapter 13 bankruptcy will remain on your report up to seven years after you declared bankruptcy. 

How Soon After Bankruptcy Can I Get a Credit Card?

How soon you can get a credit card after bankruptcy is dependent upon a few factors. For some people, it can take a few years to qualify for traditional unsecured cards, while for others, it might not take quite as long.

You cannot apply for a credit card while the bankruptcy process is still underway. All filers must wait to open a new credit account until after the bankruptcy has settled and their debts have been discharged. 

For Chapter 7, your bankruptcy could be settled through court approval around four to six months after filing. For Chapter 13, the restructuring and payment plan for your debt could cause the settlement with court approval to take three to five years.

Once the bankruptcy has been settled, you are free to apply for a credit card, but that does not guarantee you will be approved. Let’s take a look at the different options you will have for a credit card after bankruptcy, and the time it might take to get approved:

Authorized User

One excellent option for rebuilding credit immediately after your bankruptcy is to become an authorized user on someone else’s account. You can be added as an authorized user directly after your bankruptcy filing has been settled. 

Becoming an authorized user on a friend, family member, or spouse’s account will allow you to benefit from their positive payment history on your credit. To get the most out of this arrangement, you need to be sure that you can trust the card owner. If they begin making late payments or wracking up a high balance, adverse credit reporting will further harm your credit score. 

However, suppose the person is trustworthy and responsible. In that case, the payment history on their credit card could rebuild credit substantially, so your credit score is high enough to apply for a credit card of your own that much faster. 

Secured Credit Card

Secured credit cards are the perfect building block for returning to normal after bankruptcy. If you can’t yet get approved for unsecured cards, a secured credit card is an excellent opportunity to spruce up your payment history. A secured credit card requires you to put down a refundable security deposit that equals the credit limit

Here are some things you should know about these cards:

  • In the most basic sense, a secured credit card is a way of borrowing your own money while benefiting from the account and every payment you make on it being reported to the credit bureaus who compile your credit reports. 
  • Since you are putting down a security deposit that doubles as your credit limit, a secured credit card is usually very easy to be approved for. Secured credit cards, like credit-builder loans, were created for the purpose of credit score improvement.
  • After improving your credit enough through the secured card, you can apply for an unsecured card before closing the account and getting the deposit on your secured card back.

Unsecured Credit Card

Unsecured credit cards are the standard, one popular choice being Credit One Bank® Platinum Visa® which is made for rebuilding credit. Directly after filing for bankruptcy, you will most likely have a poor credit score. Getting approval for a new credit card that isn’t secured with poor credit can be challenging. The difficulty in getting approved for typical credit card options is why most financial experts recommend taking time to build your credit history through a secured card or becoming an authorized user first. 

Here are some things to consider with an unsecured credit card:

  • Credit card companies are more likely to consider your application to obtain credit more seriously if they can see proof of your efforts to recover from bankruptcy, like secured cards on your credit report. 
  • A credit card issuer may write off your application immediately if they see you are attempting to obtain a credit card directly after your discharge with no other credit-building attempts.
  • If you find a credit card issuer to approve you soon after bankruptcy, your credit limit will likely be small, and you may be charged high-interest rates. And interest isn’t even the total cost, you’ll have to factor in things like the annual fee to get a better idea. You will know about these costs, including the annual fee before signing any contract.  In some instances, patience through using secured cards may be the better option to save on costs. 

Pros and Cons of Getting a Credit Card After Bankruptcy

There are definitely some pros and cons of getting a credit card after bankruptcy that you should consider before you decide to go down that route:

Advantages of Getting a Credit Card After BankruptcyDisadvantages of Getting a Credit Card After Bankruptcy
1. Build Credit After Bankruptcy — They can help rebuild credit when used correctly, especially by making on-time payments, which have a significant impact on credit scores.1. Encouragement of Bad Spending Habits — Credit card usage can lead to overspending, particularly if you previously faced financial challenges that led to bankruptcy. It’s essential to develop better financial habits before using new credit.
2. A Safety Net for Emergencies — They can serve as a backup for unexpected expenses, offering a convenient payment method without the need for a new credit application. Most places accept major credit cards.2. High Interest Rates — Credit cards often come with high interest rates, especially for individuals with bad credit scores. Failure to pay off the balance completely by the due date can result in substantial interest charges.
3. Potential Rewards — Many credit cards offer rewards programs that accumulate over time, providing cashback or significant discounts. Paying off the credit card bill promptly can maximize these rewards.3. Negative Impact on Credit Score — Missing payments on your credit card account can significantly damage your credit score. Careful consideration is needed to ensure responsible credit card use.
4. Future Offers and Increased Credit Line — Timely payments on your credit card can demonstrate responsible borrowing, potentially leading to higher credit limits on your existing card. Other credit card companies may also extend offers to you. Revolving credit accounts can help credit utilization if balances are kept below 30% of the total credit.

How to Choose the Right Credit Cards After Bankruptcy

You’d be surprised about the different credit card options you may still have available to you even after a bankruptcy, as some credit card issuers may not have a minimum credit score requirement. 

If you do decide that you want to pursue a credit card, here are some tips on choosing the right one:

  • Secured or Unsecured — Figure out whether a secured card option is right for you, an unsecured credit card comes with the risk of overspending!
  • Why Do You Need the Credit Line/Card For? — Once you know what kind of credit line you want to pursue, think about what you want to use the card for. For example, do you need a credit line for emergency expenses, travel, or home improvement, knowing this will help you navigate. 
  • The Credit Limit — You’ll want to ensure that you’ll get a credit limit that covers your needs. 
  • The Details on the Lender — Many credit card companies have a minimum credit score required for their credit cards. And, you may know about this before having to go through a credit check. So make sure that you have a good chance before spending time applying. Also, if you are trying to rebuild credit, it will be helpful to know whether your credit card companies report to the major credit bureaus, as it can really help your credit score and credit history as long as you make your payments on time. 
  • Credit Card Terms — It is extremely important to pay attention to the credit card terms including APR, repayment dates, changes in interest rates, foreign transaction fees, promotional details (if any), reward points, the ability to get a higher credit line, any annual or hidden fees (if any), etc. Refer to your credit card issuer for details.

Other Options for Building Credit After Bankruptcy

It is vital to keep in mind that there are plenty of ways to build credit outside of credit cards. Improving your bad credit so a card issuer will look at your applications more favorably should be a holistic task. 

You ought to work to improve your overall financial health through responsible spending. We recommend saving up for an emergency fund so that if you ever hit financial trouble, you can avoid relying on credit card debt to get you through.

Here are a couple of other actions you can take to raise your FICO credit score without applying for credit cards directly after bankruptcy:

Credit-builder Loan

An excellent way to improve your credit history is through a credit-builder loan. Credit-builder loans function similarly to secured cards. Rather than receiving a loan that you later payback, a loan to build credit works differently. 

A financial institution, like a bank or credit union, sets up a closed savings account with the amount of the loan. You make fixed monthly payments to improve your credit history and credit score until the loan amount is reached. After the payments have been all taken care of, you will have access to the funds in the particular savings account.

On-time Payments on Your Student Loans

One of the key exceptions to the discharging of debts with bankruptcy is student loans. If you have student loans, making on-time payments on them each and every month is an excellent way to improve bad credit and payments history. 

Check Your Credit Regularly

To ensure your credit scores are in good shape, we recommend you do a credit check on your own report regularly. By doing a credit check often, you can more easily catch identity theft and inaccuracies that might harm your credit scores. 

If you catch issues in your credit check quickly, you can dispute them with the major credit bureaus before they have a chance to further damage your credit. 

Pay off Balances Monthly on New Credit

When you do start being approved for new credit cards again, be sure you take good care to handle your credit card debt responsibly. Getting approved for that initial credit line might be nerve-wracking as you don’t want to make the same mistakes you made before. 

If you handle the first credit cards you get after bankruptcy with care, then other credit card issuers will likely view you as more reliable and approve you for further credit. Healthy credit card strategies include keeping your credit utilization rate low and paying off your credit card balances in full every month if you are able. Paying the balances in full will allow you to avoid interest charges and have available credit as high as your credit line.

FAQS About Credit Cards After Bankruptcy

Is there a refundable security deposit for secured card options after bankruptcy?

Yes, the security deposit you provide is usually a refundable security deposit. When you close the account or upgrade to an unsecured card, and if you’ve maintained a good payment history without any outstanding balances, your security deposit is typically returned to you. Talk to your credit card company for details.

Can a higher security deposit lead to a higher credit limit on my secured credit card?

Generally, yes. The security deposit often determines the credit limit for secured cards. By providing a higher security deposit, you may be granted a higher limit, which can be beneficial for larger purchases or emergencies.

Do credit cards always come with an annual fee?

Some secured credit cards may have an annual fee, while others do not and the same goes for unsecured credit cards and an annual fee. It’s essential to read the terms and conditions before applying so you can figure out whether there is an annual fee and how much. The annual fee is separate from the security deposit and is not refundable like the security deposit. Generally an annual fee ranges from $95 to $500.2

If I consistently pay my balance and demonstrate responsible usage, can my security deposit lead to a higher credit limit without an additional deposit?

Yes, some issuers may offer a higher credit limit over time without requiring an additional security deposit. This is based on your payment history and responsible card usage. It’s a way for issuers to reward trustworthy behavior.

Key Takeaways From CreditNinja

Getting credit, specifically credit cards after bankruptcy can be challenging but possible. However, before deciding to move forward with any credit, it is essential to be aware of the pros and cons and know about alternatives! With this in mind, you can choose the right credit option for you. 

Remember, if you’ve recently gone through bankruptcy because of your financial habits, it’s best to avoid new credit accounts, until you have a good handle on them. An emergency fund can also be a great resource that allows you to take care of unexpected expenses without having to seek out credit. For more information on avoiding bankruptcy (and bankruptcy in general), credit cards, and loans check out CreditNinja’s blogs. 

References:

  1. Bankruptcy Filings Rise 10 Percent | United States Courts
  2. 8 Common Credit Card Fees and How to Avoid The | CNBC
  3. Applying For Credit Cards After Bankruptcy | Forbes Advisor
  4. Can I Get a Credit Card After Bankruptcy? | Experian

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