Rebuilding Credit After Bankruptcy: Getting Approved for Credit Cards

Using credit cards carefully can help you begin to rebuild your credit after bankruptcy.

Every time you check the mailbox, there's another credit card offer with your name on it. You're not ready to take the bait, but these fast and furious pre-approved offers — even coming in the middle of a bankruptcy — are tempting. But should you? The answer is yes, with some caveats.

Used judiciously, a credit card can help you begin rebuilding your credit. But you'll need to demonstrate that you can use credit responsibly. One way is by using a credit card for minor expenses and then paying off the credit card in full every month. Your payments and balances will be reported to the credit bureau, which will put you on the road to re-establishing good credit [source: McDowell].

However, you do need to wait until after your bankruptcy is discharged to obtain a credit card, which can be up to five years if you filed Chapter 13 and are still making payments. Opening a new credit account before your bankruptcy is discharged may require the approval of a court trustee [source: Rhode].

When a bankruptcy is discharged — which can take months or years from the time a bankruptcy is filed — you are no longer legally responsible to pay certain creditors. Specifically, you're not required to pay any debts that were discharged (forgiven) as a result of the bankruptcy. Exceptions include debts that were not discharged and on which you agreed to continue payments, such as a mortgage [source: U.S. Courts].

The day after your bankruptcy is discharged, you can open a new credit card and begin rebuilding your credit. This may prove challenging, because your bankruptcy can stay on your credit report for 10 years. And if you filed for bankruptcy because of credit card debt, you need to be sure that you can now afford to pay off your card each month. If you're ready, however, you have two types of credit cards to consider: unsecured and secured.

Most people are familiar with unsecured credit cards: you borrow money from the credit card company when you make a purchase and agree to pay it back. You'll want to pay the credit card in full each month to avoid paying interest. As a high-risk borrower, it may be difficult to find an unsecured credit card, especially one without high annual fees, monthly charges, and astronomical interest rates.

Secured credit cards often are offered to borrowers in high-risk categories — like those who have filed for bankruptcy. To obtain a secured credit card, you'll need to pony up an amount equal to the credit you are offered. For example, to open a secured credit card with a $200 limit, you'll pay $200 to the credit card company. Secured credit cards have low limits, often wholly guaranteed by money the borrower already has paid. However, they also may have annual fees, as well as application or processing fees, so you'll need to research them carefully.

With all credit cards, the payments are reported to credit bureaus. Paying in full each month will help your credit recover from the blow of bankruptcy [source: McDowell].

Sources

• McDowell, Rebecca. "Getting a Credit Card After Bankruptcy." Nolo. 2014. (Sept. 8, 2014) http://www.nolo.com/legal-encyclopedia/getting-credit-card-after-bankruptcy.html
• McDowell, Rebecca. "Should I Get a Credit Card After Bankruptcy?" Nolo. 2014. (Sept. 8, 2014) http://www.nolo.com/legal-encyclopedia/should-i-credit-card-after-bankruptcy.html
• Rhode, Steve. "When Should I Start Rebuilding My Credit After Bankruptcy?" WRAL.com. April 29, 2013. (Sept. 9, 2014) http://www.wral.com/when-should-i-start-rebuilding-my-credit-after-bankruptcy-ray/12390885/
• U.S. Courts. "Discharge in Bankruptcy." 2014. (Sept. 8, 2014) http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/DischargeInBankruptcy.aspx