Filing for bankruptcy can feel like the ultimate catastrophe. Some of your assets may be wiped out, your credit score takes a major blow and lenders no longer want your business. So if you need to get credit cards after bankruptcy, a few challenges stand in your way.
However, if you need to get your hands on a credit card following bankruptcy, it’s more than possible – and you won’t have to wait years to do it.
Here’s how to rebuild your credit after a bankruptcy and get an affordable credit card as soon as possible.
How Bankruptcy Affects Your Credit
While going through the process of bankruptcy, you can still apply for credit, but getting approved will be extremely difficult. “Creditors tend to be more skeptical while a bankruptcy is going on,” says Ashley F. Morgan, a bankruptcy attorney based in Virginia. “Additionally, your credit is often in flux while the case is pending – you have the bankruptcy filing on your credit (a negative), and all your balances still (another negative).”
How long a bankruptcy will impact your ability to get a credit card depends on the type of bankruptcy you file:
- Chapter 7. With Chapter 7 bankruptcy, all of your eligible assets are liquidated, and the cash is used to pay back your creditors. This process usually takes four to six months, from initial filing to discharge, according to legal information site Nolo.
- Chapter 13. If you opt for Chapter 13 bankruptcy, also known as a wage earner’s plan, your assets are not liquidated. Rather, you repay your debt over a three- or five-year payment plan that’s approved by the court.
Regardless of what type you file, your credit score will take a hit. A Chapter 7 bankruptcy will remain on your credit report for 10 years following the filing date, while Chapter 13 will remain for seven years. Depending on what your credit was like before the bankruptcy, you can expect your score to fall at least 100 points after filing.
Getting Credit Cards After Bankruptcy
With bad credit and a bankruptcy on your record, you might think credit card issuers want nothing to do with you. In reality, it’s quite the opposite.
Morgan says that it’s common for people to receive a slew of offers in the mail after a bankruptcy. Some banks and finance companies will actually target people who have filed bankruptcy. After filing a Chapter 7 bankruptcy, for example, a person cannot file another one for eight years. “It is a good financial risk for some companies,” she says.
However, borrower beware: Morgan notes that these post-bankruptcy credit card offers have high interest rates and fees. “I recommend reading all information about the card before signing up,” Morgan says.
If you do decide to pursue an offer from a credit card company, look for a card without any unnecessary fees, such as an annual fee. You should also aim to pay off the balance in full every month so you don’t incur interest charges.
But consider taking a step back and rethinking your goal of getting a credit card fresh out of bankruptcy. Your options will be limited, and you might not be in the ideal financial situation to take on a credit card or other type of revolving credit. Taking the time to rebuild your credit, as well as exploring alternatives to traditional credit cards, can help you borrow money at a lower cost and get back on your feet that much sooner.
How Long Does it Take to Rebuild Credit After Bankruptcy?
Even though bankruptcy is a long-lasting negative mark on your credit report, there are steps you can take right away to start rebuilding your credit. But you will need patience along the way. “The road to bankruptcy is usually a long one, and unfortunately, so is the road to recovering a great credit score,” says Andrea Clark, a certified financial planner and owner of The Table Financial Planning. According to Clark, the key to building good credit is time and new behaviors.
What are those behaviors? With little to no credit at your disposal, you’ll need to focus on the things you can do that don’t involve taking on debt. And at 35% of your FICO score, paying your bills on time is the best way to build good credit over time.
As someone who has recently gone through bankruptcy, you might think that’s a tall order. But taking the time to devise a budget – and sticking to it – will ensure your payment history shows you’ve changed your ways. Plus, you’ll develop better money habits that will prepare you for the day you do take on a credit card. “Let your budget be a road map for success,” says Clark, “assigning a job to every dollar before it is spent.”
Alternatives to Credit Cards After Bankruptcy
Whether you can’t get approved for the credit card you want right now or want to explore other credit-building tools, you have a few options at your disposal.
Authorized user. A simple way to build credit without getting your own credit card is being added as an authorized user on someone else’s card. This lets you reap the benefits of their positive payment history without taking on any credit card debt of your own. It’s a much lower-risk alternative than asking a family member or friend to co-sign a loan or credit card for you.
Keep in mind that the primary cardholder is responsible for paying the balance, and you are simply authorized to make purchases, so this won’t have as great of an impact as owning your own card. Even so, it can be a good start, especially if you have a thin credit file. Just be sure to verify that the card issuer reports authorized users to the credit bureaus.
Secured credit card. An even more effective tool for building credit that offers all the advantages of a traditional credit card is a secured credit card. Rather than borrowing against an unsecured revolving line of credit, you “secure” your credit line with an upfront deposit. This way, if you fail to pay your balance, the card issuer can recoup the money.
The minimum deposit on secured cards is usually about $200 to $500. Your credit line will be equal to or a percentage more than that security deposit. Again, make sure that your activity is reported to the credit bureaus so you get credit for making on-time payments. And compare fees – some secured cards come with exorbitant fees that can eat up your deposit before you ever have the chance to make a purchase.
Credit-builder loan. A somewhat newer financial product, credit-builder loans are designed specifically for borrowers with poor or no credit who want to build their credit scores. These loans are typically offered in modest amounts of about $300 to $1,000, and the repayment term is usually two years or less, according to the federal Consumer Financial Protection Bureau.
Credit-builder loans are often locked in a savings or certificate of deposit account so that your principal is protected and you earn a small yield by the end of the repayment term. It’s also possible to take out an unsecured credit-builder loan, though the lender will likely charge interest and want to see proof that your financial situation is stable.
Should You Apply for Credit Cards After Bankruptcy?
Going through bankruptcy doesn’t make you a failure. It can happen to anyone, especially if a medical emergency, job loss or other financial disaster happens. But the road to recovery is not as difficult as it might seem at first.
Even though a bankruptcy stays on your record for the better part of a decade, its negative impact will fade with time. If you continue to pay your bills on time and use credit responsibly and sparingly, you’ll see your credit improve. The opportunities to get low-interest credit cards with generous rewards will increase along with your credit score – just remain persistent.
Updated on Oct. 9, 2019: This story was originally published on an earlier date and has been updated with new information.