Getting a Credit Card After Bankruptcy
What is bankruptcy?
Bankruptcy is a legal proceeding designed to provide individuals and businesses—although we’ll only be addressing individual bankruptcies in this article—some freedom from their debts. There are two main types of bankruptcies for individuals: Chapter 7 and Chapter 13. With a Chapter 7 bankruptcy, most all of your debts are discharged; with a Chapter 13 filing, your debts are restructured and you’re given a set amount of time, typically three to five years, to repay a portion of the debt you owe.
While a bankruptcy can offer you a fresh start, the bad news is that it can also harm your credit for some time. A Chapter 7 bankruptcy typically stays on your credit reports for up to 10 years, while a Chapter 13 filing can stay on your reports for up to seven years. This can make getting credit after filing for bankruptcy difficult, to say the least.
Why would you want a credit card after a bankruptcy?
Given that poor or excessive use of credit is one of the top reasons people file for bankruptcy, it’s reasonable to assume that staying away from credit cards after filing for a bankruptcy could be a prudent move. But given that one of the benefits of filing for bankruptcy is a fresh start, it’s reasonable to assume that, unless you’re planning to live a credit-free life going forward, you may want a credit card someday, especially given the advantages they offer over debit cards or cash.
Making on-time, consistent payments on a credit card is also a great way to start building a positive credit history to help you rebuild your credit and raise your credit score. In fact, it accounts for up to 35% of your credit score. But here’s the Catch-22. Because payment history is such an important part of your credit score, credit card issuers are likely going to look at yours before granting you a credit card. And, unfortunately, a bankruptcy filed because you weren’t able to pay past creditors probably isn’t going to paint you as a good prospect for a major credit card.
Is it possible to get a credit card after a bankruptcy?
It most likely won’t be easy but, yes, it is possible to get a credit card after filing for bankruptcy. Before you apply for any new credit, however, you’re going to want to check your credit reports to verify that your bankruptcy has been filed or discharged.
A Chapter 7 bankruptcy should be reflected on your credit reports within 90 days of your filing date; a Chapter 13 bankruptcy takes up to 90 days after your bankruptcy discharge. Any affected accounts should show zero balances and not list past-due amounts or late payments after the filing or discharge date. These accounts should also be clearly marked as being included in bankruptcy.
You are entitled to a free copy of your credit report from each of the three major credit bureaus every year. If there are any errors in your credit reports, you are going to want to dispute the errors before applying for any new credit.
What kinds of credit cards will I qualify for?
The hard truth is that, if you’re applying for credit fresh off of a bankruptcy, you’re probably not going to have a lot of choices in which credit cards you can get. Remember, bankruptcy is a rebuilding process, so you may have to start from the bottom.
The good news is that many credit card issuers like a good redemption story, so if you can demonstrate responsible credit behavior with a less-than-ideal starter credit card, you may be able to graduate up to a better card sooner than you think. And “less than ideal” means many of the cards you’ll qualify for will likely have steeper interest rates, smaller credit lines, and higher fees.
If a major credit card—even a less-than-ideal one—is currently out of reach, consider going with one of these credit-building options:
1. Apply for a Secured Card
Unlike an unsecured credit card, which grants you revolving credit without any collateral and is what most people mean when they use the term “credit card,” a secured credit card requires you to “secure” it with collateral, typically in the form of a cash deposit. This represents less risk to the credit card issuer, so secured credit cards are usually easier to get than unsecured cards.
With a secured credit card, you can learn to use credit responsibly by making consistent, on-time payments. Most secured cards report your activity on the account to the three major credit bureaus, so a secured card can be a great way to build a solid payment history and improve your credit score. But you must use it responsibly, because any negative payment history will also be reported to the credit bureaus.
2. Apply for a Store Credit Card
Because credit limits are typically lower with store cards than with major unsecured credit cards, retailers are generally more likely to approve applicants with lower credit scores for their credit cards. Retailers report your account activity to the three major credit bureaus, so using one of these cards responsibly is a good way to improve your credit score and pave the way for potentially being approved for a major credit card down the road.
3. Become an Authorized User on Someone Else’s Credit Card
As an authorized user on another person’s credit card account, you may be able to build a credit history if the credit card company reports activity on the account to the credit bureaus for both the primary account holder and the authorized user. This could allow you, as an authorized user, to build a credit history without having to apply for a credit card on your own.
But you must exercise caution in asking someone to make you an authorized user on their account. Just as any positive payment information on the account may appear in your credit reports, if the primary account holder doesn’t treat the account responsibly, any negative payment information could also appear in your credit reports and do more harm than good in helping you rebuild your credit.
4. Apply for a Credit-Builder Loan
A credit-builder loan is a relatively newer product designed to help you build credit and show potential creditors that you can successfully make regular payments to pay off a loan. Whereas a traditional installment loan gives you the money up front, a credit-builder loan gives you the money once you have made all of the installment payments and paid the lender in full.
This may seem a bit counterintuitive to the notion of what a loan is, but the whole point of a credit-builder loan is to help you establish a positive credit history. You pay off a relatively small loan (typically less than $1,000) over a relatively short amount of time (usually six months to a year), and those payments are reported to the three major credit bureaus. Just make sure your payments are for the agreed-upon amount and on time, every time to build a positive payment history.
A bankruptcy doesn’t have to be a life sentence to an existence with no credit cards. Like anything worthwhile, it may take some time to get your credit back to a respectable place where creditors are willing to take a chance on you, but it’s not impossible. With a little hard work, diligence, and nurturing of any credit you are able to get, it is possible to be approved for a credit card after a bankruptcy.
Ready to see if you Pre-Qualify for a Credit One Bank credit card? It takes less than a minute and won’t harm your credit score.
About the author:
After realizing he couldn’t pay back his outrageous film school student loans with rejection notices from Hollywood studios, Sean focused his screenwriting skills on scripting corporate videos. Videos led to marketing communications, which led to articles and, before he knew it, Sean was making a living as a writer. He continues to do so today by leveraging his expertise in credit, financial planning, wealth-building, and living your best life for Credit One Bank.
