Credit Cards After Bankruptcy? It's Not Impossible
You just filed for bankruptcy and your credit card providers closed your accounts. Now you don’t have access to credit at all. And with that bankruptcy filing on your credit report, you’ll struggle to convince banks or credit unions to send you replacement cards.
Don’t give up. It might look bleak now, but it’s not impossible to qualify for a credit card after bankruptcy. If you’re patient, and you pay your bills on time as well as refrain from running up new debt, you might qualify for a solid rewards card faster than you’d expect.
What Happens to Your Credit Cards When You File for Bankruptcy
Not all bankruptcy filings are created equal. Chapter 7 bankruptcies are liquidation bankruptcies in which your debts are dismissed. You won’t be able to claim this type of bankruptcy if you have too much income coming in each month. You instead might have to file for Chapter 13 bankruptcy, in which you repay at least a portion of your debts according to a payment schedule set up by a judge. Chapter 7 bankruptcies remain on your credit reports for 10 years, while Chapter 13 filings generally remain for just seven years.
But in both types, you’ll probably lose your credit cards, said Nathalie Noisette, owner of Credit Conversion, a credit counseling agency in Avon, Minnesota.
In a Chapter 7 bankruptcy, your credit card debt might be liquidated. In a Chapter 13, you might have to pay off all or part of it according to a monthly payment schedule that you can afford. Regardless of which type of bankruptcy you file, though, most credit card providers will cancel your account, Noisette said.
"They’ll want to collect whatever debt they can and then they won't want to do business with you anymore," Noisette said.
Most people, then, find themselves with no plastic in their wallets after bankruptcy.
How do you change this? And how can you speed the process of being able to qualify for a solid credit card after bankruptcy? There are no secrets. Qualifying for a new credit card will require patience and discipline.
The good news? It’s far from impossible.
A Credit Destroyer
You can expect your FICO score to drop by 100 points or more if you file for bankruptcy. An "excellent" credit score drops less than an average or lower score.
This is what makes qualifying for a credit card so difficult after bankruptcy. Credit card issuers will see the bankruptcy filing on your record for 10 or seven years. At the same time, your credit score will have plummeted. This combination will scare off banks and other financial institutions who will rightly worry that you won’t make future credit card payments on time.
Fortunately, rebuilding your credit after a bankruptcy isn’t impossible. It just takes time. And you will be able to qualify for some credit cards while you are going through this rebuilding process.
Credit cards might have gotten you into financial trouble in the past, with your overspending leading you to bankruptcy. But credit cards are a key tool for rebuilding your credit, as long as you use them wisely.
The key word there is “wisely.” This means charging items each month that you know you can afford to pay back in full when your credit card bill comes due. These on-time payments are reported to the three national credit bureaus, Experian, TransUnion and Equifax. Over time, they boost your credit. If you use your cards in this way — and avoid running up a balance each month — you’ll steadily increase your credit score while also avoiding the debt problems that led you to bankruptcy.
Rebuilding With Credit Cards
Ashley Morgan, a bankruptcy attorney in Herndon, Virginia, says that consumers should take a "rinse and repeat" approach to using credit cards after a bankruptcy. She recommends that consumers take a bill that they pay every month, whether it's the cable, phone or utility bill, and set that bill to auto pay with their credit card. Then, pay the bill in full each month.
This will give you the regular monthly payments that help rebuild your score. If you limit your credit card usage to these recurring payments, you'll also be less likely to charge up too much debt again.
"It's a bit like improving your credit without doing anything," Morgan said.
Morgan says it usually takes consumers six months to a year after filing for bankruptcy to qualify again for a traditional credit card if they take steps to rebuild their credit as soon as their bankruptcy filing discharges.
But What If Banks Won’t Give You Credit Cards?
But how can you make these on-time credit card payments if banks or credit unions won’t approve you for traditional credit cards? You rely on secured credit cards.
Secured cards act like traditional credit cards. You receive a card with a set credit limit. You can then use this card to make purchases, if those buys don’t push you past your credit limit. You then pay off your purchases in full each month to avoid carrying a balance and racking up interest.
The difference, though, lies in collateral. With a traditional credit card, you don’t put up any collateral. With a secured card you do. When you apply for a secured card, you provide your bank with a deposit. That deposit then becomes your credit limit. Say you give your bank a deposit of $500. The credit limit on your secured credit card is also $500.
This way, if you fail to make your payments, the bank behind your card can simply take what it is owed from the deposit you already gave it.
This lack of risk is why it’s easy for consumers to qualify for secured cards even if they have weak credit or blemishes, such as a bankruptcy filing, on their credit reports.
“There are many banks that will give people secured credit cards right away,” Morgan said. “They won’t even pull your credit. There is no risk for the bank. You default? They take your money and go on their merry way. It’s a win-win for both sides.”
If you make all your payments on a secured credit card for about a year, you should be able to apply successfully for a traditional credit card, Morgan said. The bank or credit union that sent you a secured card might even offer to turn that card into a traditional credit card, she said.
That new traditional card might be a bare-bones card with a low credit limit. But if you make charges with it, and pay them back in full each month, you’ll continue rebuilding your credit score. Over time, it will be high enough so that you can qualify for better cards that offer rewards programs.
Make sure, though, that you’ve corrected the negative spending habits that led you to bankruptcy. You don’t want to qualify for better credit cards only to start running up debt on them that you can’t pay each month. That’s a good way to fall back into financial difficulties, Morgan said.
Other Rebuilding Options
Secured cards aren’t your only option for rebuilding. If you are paying back student loans, keep making those payments on time. Student loan debt typically isn’t discharged in any bankruptcy filing, so you’ll still be responsible for paying back this debt. Every time you make an on-time student-loan payment, it will be reported to the national credit bureaus. This will steadily boost your credit score, too.
Another good choice? Becoming an authorized user on the credit card of someone else, usually a parent or other close relative, Noisette said. When you become an authorized user, your name goes onto the credit card account of someone else. Whenever that person makes an on-time payment, it is reported in your credit history, too, boosting your score over time.
There are some challenges with this approach. First, you have to find someone you trust. If the primary account holder misses payments, that credit mishap will go on your report, too, hurting your credit. Second, you must find someone who’s willing to take a risk on you. If you’re added as an authorized user, you will be sent a credit card with your name on it. If you use that card to rack up purchases, the main account holder is responsible for your new debt. It might not be easy to convince even parents to take on that risk.
There is a way around this, Noisette said. The primary account holder can ask that the bank not send you a card. This way, your name will be on the account as an authorized user, but you won’t have access to the credit card, offering some protection for the primary account holder, Noisette said.
You might also consider a credit-builder loan. When you take out one of these loans, a bank or credit union will deposit a small amount of money into savings account, usually an amount from $500 to $1,000. You then pay back this money with a set payment each month.
After you pay back the entire loan, something that usually takes anywhere from six months to two years, you receive the total amount that the bank or credit union deposited. You might also earn interest if the financial institution offers that.
Those regular monthly payments are important, Morgan said. These payments will be reported to the credit bureaus, too, and will gradually boost your credit score.
The Bottom Line
“Getting back to FICO score of 700 or more is not impossible after bankruptcy,” Morgan said. “It might take two to three years of making payments on time, but you can get there if you are willing to put in the work.”
Arriving at the decision to declare bankruptcy is a difficult one that has long-term implications. Once you've made that choice there are a number of paths to help you earn good credit again. You might not be ready to take on a credit card if they caused you problems in the past. But, having good credit is important for so many things, including some job applications as well as home and apartment rental. Consider the best method to get you headed down the right path to a higher credit score.