It’s true that a bankruptcy dismissal of your debts will cause serious damage to your credit file for ten years, you might be surprised to learn you can rebuild a good credit rating long before that ten years has passed.
After filing for bankruptcy, many people think they must live on a strictly cash basis and don’t realize credit is available to them. There is no need to build up massive credit debt to repair a damaged credit rating.
Even small loans and small purchases will build credit effectively as long as all payments are made in a timely way and all terms of the loan or account are followed carefully.
Rebuilding Your Credit
The easiest way to begin to rebuild credit is with the use of a secured credit card. This is a card that requires you to pay first and charge later.
You will be depositing an amount of cash in a special account where it will earn interest but will not be available to you.
You are issued a credit card with a spending limit that is often equal to the amount you deposited. In some cases, the credit limit may be more or less than your deposit depending on the lender’s guidelines.
Some of the most often recommended secured and bankruptcy credit cards are listed below. Worth to mention is the fact that bankruptcy credit cards are often issued by smaller banks and financial rather than the big name credit card lenders.
All of the credit lenders shown below reported monthly to the three major credit bureaus.
Public Savings Secured Visa Credit card
Platinum Zero Secured Visa Credit Card
Applied Bank Secured Visa Gold Credit Card
First Premier Bank Secured Credit Card
Centennial Secured Credit Card
If you have a new secured credit card with a limit of $500, never allow the balance on that card to exceed $150-200. You cannot re-establish credit if you are seen as overspending and that’s the appearance you give if you max out your credit cards.
The old advice for those re-establishing credit with a secured card was to allow a balance to carry from month to month. That is no longer necessary.
You can pay off the balance each month when the bill arrives and you will be building credit. That means you don’t have to buy things you don’t need or shop from a wish list of items you can’t afford right now.
You can pay for groceries with cash, subtract the amount from your checkbook balance and pay the credit card in full when it arrives. You will not pay interest and will not be building more debt that might cause problems in the future.
Using a low limit secured credit card for planned purchases and paying it off monthly is a good training method for personal financial management for those of us who have been irresponsible with money or credit in the past.
You don’t want to take the first secured credit card you can find. Some of them will help you immensely while others will do you no good at all.
Three Things To Look For…
There are 3 things to look for in an offer of a secured credit card and all three must be present in order to fit under the bankruptcy category.
1. Look for no application fee and low annual fee
Lenders may charge a high annual fee in an attempt to obtain more profit from secured credit card accounts.
A few will also add on application or other upfront fees. If you see up front fees mentioned just walk away. The same is true if there is a significant annual fee attached to the account.
2. Does the lender report regularly to the major credit bureaus?
Some issuers of secured cards operated just as they do with unsecured credit accounts. They report monthly to the three major credit reporting agencies. A few will report quarterly.
Some issuers of secured cards do not report to the credit agencies unless there is a problem or late payment on your account.
It doesn’t help to pay this card on time if the payment record isn’t being shared with the credit bureaus as it won’t help you credit unless your payments are reported.
3. Will the account convert to a standard unsecured credit account at some point in the future?
The ideal bankruptcy credit cards will have the ability to convert your account to a standard credit card after 12-18 months of responsible use on your part.
This is a valuable benefit to you even if the lender requires two years of timely payments and good account management on your part before changing card to an unsecured credit card. When that happens, you will be refunded your deposit used to secure the original account.
You will pay interest to the lender for a secured credit card but you will also earn interest on the money you deposited to provide security for this credit card.
The limit placed on the secured card is usually only $300-500. For those who had credit cards with tens of thousands of dollars of credit available prior to bankruptcy, this may sound like a ridiculously small amount.
It’s good to remember those big credit lines may have been what drove you to bankruptcy court. Starting over in a small way will help keep the problem of overspending from happening again.
I also recommend you to check out our guide on how to apply for a credit card with bad credit as it will give you some really helpful tips!