How to Get New Credit to Survive and Thrive After Bankruptcy
In our series, Surviving and Thriving After Bankruptcy, we’ve been discussing aspects of post-bankruptcy life that clients need to take into consideration to make a successful transition to financial wellness.
For many of our clients, their financial struggles have left them with a sour taste in their mouths for credit cards and personal loans. I don’t blame them, and I caution everyone against jumping headlong at the first opportunity they encounter to take on new debt.
But for many other clients, an important question is how soon they will be able to get new credit.
Getting new credit after bankruptcy is not an impossible task. In fact, lenders often see recently discharged individuals as good customers, with little debt, who are motivated to handle money and debt responsibility and cannot file bankruptcy again for a number of years (eight years to file another Chapter 7, four years to file a Chapter 13).
In fact, there’s a really good chance that you will receive offers of credit within just months of leaving bankruptcy. I kid you not. Many of my clients have received offers from credit card companies, automobile lenders and home appliance stores specifically acknowledging that the client filed a bankruptcy case. They usually go something like this,
Dear Potential Customer: We understand that you recently received a discharge in a bankruptcy case. Don’t let that derail your plans. We would like to help you establish credit right away that you can use to [purchase a car, buy furniture or take a vacation]. Just check out our generous lending terms on the attached disclosure sheet, sign the enclosed agreement and we’ll get you back on the road to financial freedom and a high credit score.
When you look at the “generous lending terms” you might find that the only thing generous about them is the fact that they’re being offered to someone who just emerged from bankruptcy. High interest rates in such offers are more the norm.
That doesn’t mean that you can’t or even that you shouldn’t take advantage of them.
Some of them may actually make sense.
Most credit offers after bankruptcy will come from either banks offering branded credit cards like Visa or MasterCard (often secured), or they will come from local merchants, like car dealerships, appliance retailers and department stores.
A good place to start may be with a department store card. Local retailers are often more generous in their application acceptances for recently discharged debtors and more generous in their credit terms. You should not expect a high credit limit, at least at first.
Secured Credit Cards
A secured credit card is usually one that is backed by a savings account attached to the account that matches or nearly matches the credit limit on the card. If that sounds more like a debit card than a credit card, you are not wrong. However, there is a big difference. Instead of drawing on the account as you make purchases, the lender holds the money in the account, and allows you to make regular payments as you would expect to do with a credit card. This has an advantage of allowing you to prove your credit-worthiness. If you fail to pay, however, the creditor only has to draw on the savings account to cover your debt.
But then, you’d be losing that savings and failing to maintain a credit account, which isn’t going to look good on your credit report.
Secured credit cards usually carry high fees and high interest rates, although not as high as unsecured cards (see below) because the risk to the lender of losing money on a secured card is lower than an unsecured card. Some of branded credit card offers you’ll receive will come with low-credit limits and high interest rates because the lender has bought into the notion that someone who has filed bankruptcy is more likely to file again (that's not true.)
For more information on some secured credit cards available to people who filed bankruptcy, check out: 5 Credit Cards You Can Get After Bankruptcy
Unsecured cards are like the ones you probably had before you filed bankruptcy: you didn’t expressly put up your purchases or anything else as collateral for the debt you were offered.
These cards will almost certainly charge high interest rates, administrative fees and annual fees.
One lender that seems to specialize in post-bankruptcy credit card lending is Orchard Bank. This is not an endorsement of Orchard Bank, but many clients have found their products useful, especially if they need a credit card for business or travel.
I always caution clients to keep the balances low or zero, pay as agreed and request modifications to the account as soon as possible, like a reduction in the numerous fees that seem to accompany them.
Avoid Payday and Title Lenders!!!
I cannot emphasize this enough. Do not, repeat, DO NOT, visit a payday or title lender. They will offer you the worst terms in the market and you will be in danger of hitching your wagon (sometimes literally) to them for time immemorial. The way these loans are often structured, it is extremely difficult to pay them off and get out from under the obligation. Many require that you pay back the entire amount borrowed at once, and if you cannot do that, you must make an exorbitant interest payment for the privilege of carrying the loan another week or month. These interest rates can range up to 600% or more. That should be criminal.
In addition, they may get you by requiring that you write checks for payments ahead of time that the lender will hold until your payment dates. If the check isn’t good, the lender will charge you a high fee for a bad check and may even turn it over to your local district attorney’s office for prosecution.
Title loans work similarly, but are often even more insidious because the lender will take your vehicle as collateral. If you don’t pay as agreed, or at least keep up high interest payments, expect that your vehicle will not be parked in your driveway one morning when you need to get to work.
Here's what the Federal Trade Commission has to say about payday lending: Payday Lending
For more articles in the series, see
Surviving and Thriving After Bankruptcy: Getting New Credit
Surviving and Thriving After Bankruptcy: Credit Reports