When you filed for bankruptcy, you probably swore you'd never get in a credit bind again, regardless of whether it resulted from job loss, divorce, medical issues, or just overspending. But credit cards are valuable tools for rebuilding your credit, which is important not only for getting future loans, but also sometimes for securing a job or apartment.
While it’s true that bankruptcy can stay on your credit record for up to 10 years, what many people don’t realize is what happens to the debt afterward. Learn how quickly you'll be able to get back into the credit market after you receive your bankruptcy discharge.
Some banks and card issuers are so ready to lend to people emerging from bankruptcy that they actively market to them while they’re still in a bankruptcy case. It's not unusual for people to receive credit offers from credit card companies, local car dealerships, and furniture stores. But, don't fall for every offer coming your way. Some are worth investigating, but others are downright silly, and their terms are painfully bad.
Why Credit Card Companies Are Eager to Lend to Chapter 7 Bankruptcy Debtors
It seems counterintuitive that a bank or lender would be willing, much less eager, to give credit to someone who just caused their competitors to lose hundreds or thousands of dollars. But, these are the sound and rational reasons for it:
- You as a debtor just discharged thousands of dollars in debt, which frees up resources (i.e., income) that can be used to pay back a new credit card balance.
- You cannot file another bankruptcy for some time. For instance, if you received a discharge in a Chapter 7 case, you can’t receive another Chapter 7 discharge for eight years.
- The creditor can charge you a higher interest rate.
Types of Credit Cards You Can Qualify for After Filing Chapter 7 Bankruptcy
Credit cards that you might qualify for may be secured or unsecured.
Secured Credit Card
There are things you should know about a secured credit card before you open one up. The card issuer will require you to deposit a sum of money into a special savings account with the institution. That deposit amount is usually equal to the lending limit the institution will allow on the account. The deposit acts as security for the lender. If you default in the future, the lender won’t be out any money because it only has to draw the money from the deposit account to pay down or pay off the credit balance.
Unless the deposit is used to pay your balance, the money in the savings account still belongs to you. After a period of on-time payments, many companies will allow you to convert a secured card to an unsecured card with a higher credit limit.
A secured credit card often has a lower interest rate than any unsecured accounts you can qualify for right after bankruptcy.
Our list of the best secured credit cards is a good place to start your search and find out what some of the top cards are offering.
Unsecured Credit Card
You should also know what an unsecured card is and how to get one. This type of card is the industry standard. It’s unsecured, meaning you don't have to put up any deposit or collateral. If you default on your payments, the credit card company has nothing to apply against your balance. Therefore, its only recourse is to take legal action if you do default.
There are a few unsecured credit cards for people with bad credit, such as the Credit One Bank Platinum Visa. While you won't have to put down a deposit for this card, you could get an interest rate about five percentage points higher than the average rate for a secured credit card.
No matter what your interest rate, it's important that you keep your balance low on your new credit card. This will not only save you expensive interest charges, but also keep your credit utilization ratio low, which is a key part of building good credit.
Important Factors to Keep in Mind
There are two major issues that people who have filed for Chapter 7 bankruptcy should keep in mind when considering a new credit card.
Because you are considered a higher risk for credit card companies, the interest rate you're approved for on a new unsecured card will be higher than it would be for someone with good credit. To get an idea of what different kinds of cards charge, check out the average credit card interest rates.
Card issuers often charge annual fees for their cards, and many that provide credit after bankruptcy charge even more. Look out for these specific fees, and be proactive in asking about them:
- Set-up fee
- Transaction fee
- Administrative fee
- Application fee
It’s not unusual for a new account holder to be awarded an account with a credit limit of $300, only to be slapped with $150 in fees the moment their application is accepted. For the account to be useful at all, you have to pay off those fees as soon as possible, but if you don't, you’ll be paying even more in interest charges. Either way, the lender wins.