Getting a credit card after filing for bankruptcy can be difficult because of the long-term damage to your credit score. A bankruptcy stays on your credit report between seven and 10 years, although the negative impact gradually lessens over time. Shortly after your bankruptcy, you will have limited credit card options. Secured cards and being an authorized user of another person’s card are the best options, since unsecured cards come with high interest rates and high fees. While all of these can help rebuild your credit after bankruptcy, you shouldn’t rush to re-acquire your cards. Instead, carefully consider why you ended up in bankruptcy and if you’re financially prepared to manage credit again.
When to Apply for Credit Cards After Bankruptcy
You must at least wait until your bankruptcy is discharged and is reflected in that way on your credit reports before applying for a new credit card. When the discharge occurs depends on the type of bankruptcy you file. There are two common types of bankruptcy for individuals: Chapter 7 and Chapter 13.
|Type of Bankruptcy||When You Can Apply for Credit Card|
|Chapter 7||After about 3 months|
|Chapter 13||After 3-5 Years|
Chapter 7 bankruptcy, also known as a liquidation of assets, liquidates eligible assets to pay off as much of your outstanding debt as possible. The bankruptcy and debts associated with it is typically discharged within three months. A Chapter 7 remains on your credit report for 10 years from the filing date. In a Chapter 13 bankruptcy, also known as an adjustment-of-debt plan, the debtor makes partial payments to creditors as part of three- to five-year repayment plan. The bankruptcy is discharged after the completion of the plan. A Chapter 13 remains on credit report for seven years from the filing date.
Once your bankruptcy is discharged, you should pull your credit reports from Equifax, Experian and TransUnion to confirm that your lenders are accurately reporting the discharge. Only the debts included in the bankruptcy filing should be reported as discharged. Also, double-check that all of those accounts included in the bankruptcy show a zero balance on your credit reports. After you’ve confirmed that your credit reports are accurate, you can then consider applying for a new credit card. Even after your bankruptcy is discharged, it may take a while to qualify for a new credit card. Some credit card companies may reject your application simply because you have a recent bankruptcy on your credit report. Others are less stringent because your risk of filing for bankruptcy again is low. That’s because there are rules restricting when you can file for a second bankruptcy, which differ depending on the type of filing.
Credit Cards Available Post-Bankruptcy
There are a few types of credit cards that are available to consumers shortly after a bankruptcy. But keep your expectations low. A bankruptcy hurts your credit score for a long time after the filing, making it harder to qualify for unsecured credit cards with low interest rates, high credit limits and rewards programs. The unsecured cards available to you, then, are likely to have small credit limits, high fees or interest rates and limited perks. Because of these drawbacks, you should consider whether it’s worthwhile to even apply for an unsecured card in the first place. It will take many years of rebuilding your credit before your credit score is high enough to qualify for more premium credit cards.
Secured credit card: This kind of credit card is designed for people with bad credit (below 660 FICO score) or no credit, and offers a way to rebuild your credit history slowly. Secured cards require an upfront small-dollar deposit, typically between $200 and $1,000, to act as a guarantee against the card’s line of credit. Generally, the credit limit is equal to the amount of the security deposit. There are a handful of secured credit cards, though, that require only a nominal security deposit and charge no annual fee, yet provide a higher line of credit. The deposit is returned if you close the account with a zero balance.
The annual percentage rates (APRs) on secured credit cards are typically higher than the average credit card, easily running into the mid-20s. The key is to use the card responsibly, charging no more than 30% of the credit limit and paying off the balance each month in full. Make sure your card issuer reports your payment history to at least one of the three credit bureaus, so you can rebuild your credit history. Some lenders will return the security deposit to cardholders after having made timely payments over a long period, such as 12 months, and convert the card to an unsecured one. A few secured cards also come with a rewards program, but be careful to not overspend to earn rewards.
Authorized user: Another way for you to get a credit card after bankruptcy is to become an authorized user on a card account belonging to someone else, such as a partner, parent or close family member. This is a great option if you’re focused on building credit. That’s because the card’s payment history will be added to your credit report, helping to improve your credit score. To get the most credit-building power, become an authorized user on a card that has a high limit, low balance, and long, positive payment history.
If you want to use the credit card for spending, you and the primary account holder should agree on how much can be charged per month and what types of purchases can be made on the account. It’s important to follow this agreement because only the primary account holder is responsible for the debt on the card. An authorized user is not legally required to make payments, even though they have their own credit card. If you overcharge without permission, that can jeopardize the primary account holder’s ability to make payments and threaten your relationship with that person.
Avoid Unsecured Credit Cards After Bankruptcy
There are a handful of unsecured credit cards aimed at consumers with bad credit, including those with a past bankruptcy. The majority of these cards come with very low credit limits; high APRs, of between 25% and 29.99%; and annual fees that can easily exceed $100 a year. Some also have a one-time processing fee to open the credit card and monthly servicing fees on top of the annual fee. In short, you pay a lot for the privilege of avoiding a security deposit. Similarly, store credit cards also have lower qualification standards, so a bankruptcy may not disqualify you. But these, too, come with low limits and high APRs, and usually have limitations on where they can be used.
Because of their fees, unsecured credit cards for bad credit typically are significantly more expensive than secured cards. There are plenty of secured cards that don’t charge annual fees. You also can get your security deposit returned as long as you pay your balances off in full every month, on time. But with these unsecured cards, the annual fee and other fees you pay won’t be returned.
Should You Get a Credit Card After Bankruptcy?
Getting a credit card after bankruptcy can be a smart move, provided you can manage it responsibly. The bankruptcy will have damaged your credit score, and making on-time credit card payments is one of the best ways to rebuild your creditworthiness. Before filling out a credit card application after your bankruptcy, though, consider the reasons you got into financial trouble in the first place and if getting more credit is a move you can handle at the moment.
Perhaps your bankruptcy was the result of an unforeseen and unlucky event, such as a medical emergency, divorce, job loss or natural disaster, rather than due to bad money decisions. In that case, you’re more likely to be ready for the fiscal responsibilities of having a credit card again, and to beginning the long road to rebuilding your credit. Just make sure to shore up other areas of your finances first—such as having a stable job and creating an emergency fund—so you can be prepared for any unexpected challenges you may face in the future.
If, however, the financial spiral that landed you in bankruptcy included overspending, under-saving or bad budgeting, don’t be too quick to access credit again. Instead, work with a credit counselor or financial planner to create a workable budget based on your income and monthly bills. It should also include a plan to grow your savings. If you need the convenience of a payment card in the meantime, use a debit card linked to your checking account or a prepaid debit card. Once you have demonstrated, to yourself and others, that you can pay your monthly bills on time and save consistently over a long period of time, then consider adding a credit card again to the mix. Use it sparingly and responsibly to improve your credit and to build your confidence in managing debt.