There's a financial word that many people dread: bankruptcy. To most it means the end of their financial lives, and they believe they will spend the next several decades digging themselves out of the hole they were thrust into. Fortunately, bankruptcy actually isn't the end; it's the beginning. It's a fresh start where you can build your credit back up in a sustainable manner.
Building credit takes time, but what happens when you have poor credit and you're having trouble finding a credit card to start building your credit again? creidt, there are options that have been specifically created for those with less than stellar credit scores. Here are some tips on how to get approved for a credit card after bankruptcy.
Why Creditors Give Cards to High-Risk Applicants
Once you declare bankruptcy, you instantly fall into the high-risk category of applicants. Not only will your credit score drop 130-240 points (the higher your score pre-bankruptcy, the more points it will drop) but you will also have a mark on your credit report showing that you had a bankruptcy, instantly telling lenders that you have a history of not paying back your debts. Both of these factors add up to a big hit that can seriously impact your ability to obtain credit. But if you can't get credit, how can you start building your score back up? Fortunately, there is a way, though, you aren't going to find a sweet deal or comfortable terms until you can build up your score once again.
You can only file for bankruptcy once every eight years (for Chapter 7). This limit was implemented so that people couldn't abuse the system and use bankruptcy as an easy way to rack up debt and then wipe the slate clean on a regular basis. For the creditor, this means you are going to be stuck paying your bills for quite a while and that they can take the risk of offering you credit once again.
Just be careful. When you get credit card offers after your bankruptcy has gone through, the terms are going to be stacked high against you. You will be looking at much higher APR's, high annual fees, low credit limits, and a lot of protections for the card company.
So how do you get started?
Secured vs. Unsecured Credit Cards
Most credit cards fall into the category of unsecured credit. This means you are extended credit based on your promise to repay the money. There is no physical property behind the loan (such as in the case of a car loan or a home mortgage). For those who enjoy good credit, they get the perk of having unsecured credit cards, often with high spending limits.
Those who have suffered credit score setbacks, however, are extremely limited with their unsecured credit card choices. To get around this, you can apply for secured credit cards. These cards usually come with a low credit limit (generally around $500 or so), and require that you place $500 (or whatever limit you achieve) down as collateral. If you miss payments, or otherwise violate the terms, you may end up forfeiting your collateral (plus any applicable security deposits). It sounds scary, but if you grow your credit the right way, you don't ever have to worry about losing your deposit or collateral.
Growing Your Credit
Your credit score is determined by a combination of your payment history, the number of accounts you have open, the length of your credit history, the amount of credit you have available, the number of hard credit pulls on your account, and any delinquent marks that you might have (such as a bankruptcy). So how do you get a credit card and improve your credit when you are scoring abysmally on every mark? Here's what you do.
Apply for a secured credit card. There are plenty of different options out there and most of the terms are pretty similar.
Use your new card for a few small purchases each month. Fill a tank of gas, buy some groceries, pay your car insurance, it really doesn't matter what it is. Just be aware of your credit limit and what you can actually afford to put on your card.
Pay the card off, in full, every single month. You want a good track record of paying your bills on time. It's a myth that your credit grows faster when you carry a balance, just pay it all off.
That's all there is to it. In a year, you can re-evaluate and see if you can get a card that offers more favorable rates or rewards points
Making Sound Financial Decisions
Bankruptcy is hard. It's a hard decision to make, and it's emotionally hard to handle. But it's not the end of the world.