Rebuilding credit after a personal bankruptcy can be a lengthy process. It may take several years of regular payments showing a responsible use of credit for filers to become eligible for larger loans and better credit opportunities.
Credit cards are typically the first type of credit available to successful bankruptcy filers after their discharges. Specifically, most people begin rebuilding their credit with a secured credit card. They pay a deposit to limit the risk assumed by the lender and then make monthly payments to establish a history of responsible use.
Checking the fine print before committing to a post-bankruptcy credit card is important, as some lenders take advantage of those who have struggled with credit in the past and who need to rebuild financially.
What are some of the warning signs that a post-bankruptcy credit card is not the best option?
1. Upfront fees
Requiring a security deposit is a reasonable form of protection for a lender. Demanding a fee to check credit approval or to establish the line of credit usually is not. Additionally, borrowers should not have to pay a monthly fee to maintain their line of credit. Even the security deposit-to-credit-limit ratio could be indicative of inappropriate lender practices. A one-to-one deposit to credit line ratio is appropriate, and anything beyond that may be unnecessary.
2. Declining to report to credit bureaus
The main point of obtaining a new credit card after bankruptcy is to show a history of responsible credit use. If a lender does not report to any of the three main credit bureaus, there is no documentation of the cardholder’s efforts to rebuild their finances. Choosing a credit card that reports to all three credit bureaus is typically the best option for those hoping to improve their credit scores after bankruptcy.
3. Immediate interest accrual
Most credit card lenders offer at least 30 days or one month as a grace period between the billing date for the credit card and when interest begins accruing. Some lenders providing credit to those with recent bankruptcies may start calculating interest the same day that they generate a statement or even on the date of the initial charge. In such cases, borrowers may end up accruing substantial interest, even if they pay their balances in full every month.
Starting with a single secured line of credit that requires a reasonable deposit and then seeking better credit opportunities from other companies as time passes can be an effective strategy for those who want to qualify for mortgages or other higher-value lines of credit. Bankruptcy filers who have a plan before they begin rebuilding their credit can make the most of their bankruptcy discharge and work toward the best possible financial future after bankruptcy.