When you file for bankruptcy, you may swear that you will never fall into credit trouble again, regardless of whether the reasons stem from job loss, divorce, medical issues, or simply overspending. However, credit cards are valuable tools for rebuilding your credit, which is important not only for securing future loans but sometimes also for obtaining a job or an apartment.
Why are credit card companies eager to extend credit to Chapter 7 bankruptcy filers?
It seems odd that banks or lenders would be willing, and more importantly, eager, to extend credit to someone who just caused them to lose hundreds or thousands of dollars. But here are the sound, logical reasons for that:
- As a debtor, you have just discharged thousands of dollars in debt, freeing up resources (i.e., income) that can be used to pay off a new credit card balance.
- You cannot file for bankruptcy again for some time. For example, if you received a discharge in Chapter 7, you will not be able to receive another Chapter 7 discharge for eight years.
- The lender can charge you a higher interest rate.
Types of credit cards you may qualify for after filing for Chapter 7 bankruptcy
The credit cards you may qualify for can be secured or unsecured.
Secured credit card
There are things you should know about a secured credit card before you open one. The card-issuing company will require you to deposit a certain amount of money into their savings account. The deposit amount is usually equal to the credit limit that the company will allow on the account. The deposit acts as collateral for the lender. If you default in the future, the lender will not incur any losses because they can withdraw the amount from the deposit account to cover the credit balance.
Unless the deposit is used to pay off your balance, the money in the savings account still belongs to you. After a period of timely payments, many companies will allow you to convert the secured card to an unsecured card with higher credit limits.
Secured credit cards typically have a lower interest rate than any unsecured accounts you may qualify for immediately after bankruptcy.
Unsecured credit card
You should also understand what an unsecured credit card is and how to obtain one. This type of card is the standard in the industry. It is unsecured, meaning you do not have to put down any deposit or collateral. If you default, the credit card company has nothing they can claim against your balance. Therefore, their only option is to take legal action if you default.
There are some unsecured credit cards for people with bad credit, such as the Credit One Bank Platinum Visa. Although you will not have to make a deposit for this card, you could receive an interest rate about five percentage points higher than the average secured credit card.
Regardless of your interest rate, it is important to keep your balance low on your new credit card. This will save you not only from expensive interest charges but also keep your credit utilization ratio low, which is a key component in building good credit.
Important factors to consider
There are two main factors that people who have filed for Chapter 7 bankruptcy should consider when looking for a new credit card.
Interest rates
Since you are considered a higher risk to credit card companies, the interest rate you will be approved for on a new unsecured credit card will be higher than that of someone with good credit. To get an idea of what different types of cards charge in interest fees, check the average interest rates for credit cards.
Fees
Often
Card issuers impose annual fees on their cards, and many charge even higher fees to provide credit after bankruptcy. Pay attention to these specific fees and be proactive in asking about them, such as setup fees, transaction fees, management fees, and application fees.
It is not unusual for a new account holder to be granted a credit limit of only $300, only to be hit with $150 in fees the moment their application is approved. To make the account worthwhile at all, you must pay off those fees as soon as possible, but if you don’t, you’ll pay more in interest fees. In either case, the lender wins.
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Sources:
- Consumer Financial Protection Bureau. “How Long Does Negative Information Remain on My Credit Report?”
- United States Courts. “Discharge in Bankruptcy—Bankruptcy Basics.”
Source: https://www.thebalancemoney.com/best-credit-cards-after-bankruptcy-4158062
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