A Chapter 7 bankruptcy forces bankrupt filers to liquidate their assets, and it’s a relatively short process. Once you have sold the assets that you are required to sell, any debts that could not be repaid will be discharged. This type of bankruptcy typically takes three to six months to be discharged after filing for bankruptcy.
A Chapter 13 bankruptcy discharge takes much longer because it requires the debtor to follow a three to five year repayment plan. You can only apply for a credit card during a Chapter 13 repayment plan if you have the approval of the trustee. Even if you do, the credit card company may deny your application since you are still in bankruptcy proceedings.
How to choose the best credit card after bankruptcy
Choosing a new credit card after bankruptcy is an important decision to make. The goal is to find a quality card from a reputable card issuer that you can use to create credit. Here are some tips you can follow to make your job easier.
1. Get your credit score and your credit report
You already know your credit score has taken a hit, but you still need to know where it is now. This will play a role in which credit cards you qualify for. If you’re looking for a free place to check your credit, Experian and Discover both have tools that provide your FICO® score (the type of credit score most used by lenders).
Also pull your credit report from each credit bureau: Equifax, Experian, and TransUnion. Review them for any errors on your credit history that could affect your credit score. Your credit report will also tell you exactly when your bankruptcy was reported.
2. Check if you are prequalified for credit cards
Many credit card issuers have an online prequalification tool. After filling out a form with basic information, this tool lets you know if you are prequalified for any of this issuer’s credit cards. It’s not a sure thing, but it does mean that you have a good chance of getting a credit card approved.
3. Shop around for credit card options
Find out which credit cards that are right for you are available from major banks, your local credit union, and any other credit card issuers you find. Bad credit credit cards are a good place to start after bankruptcy. These are intended for consumers with a lower credit rating. Card issuers often have a section with cards designed to build and replenish credit on their websites.
Another option for bad credit is secured credit cards. This type of card requires a security deposit up front, so card issuers are more lenient with applicants they approve as they won’t have to worry about unsecured debt. With a typical secure card, the minimum security deposit is $ 200, but there are a few that have lower minimums.
4. Review the card issuer’s bankruptcy rules
Credit card companies all have their own restrictions on bankrupt applicants, and you can often find this information in the terms and conditions of their cards. If you are considering applying for a credit card, research the “bankruptcy” terms and conditions to see if there are any rules that would result in a denial.
For example, Capital One will not approve any applicant with an undischarged bankruptcy. So while it has some of the best credit cards after Chapter 7 bankruptcy, you wouldn’t want to apply if you’re in the middle of a Chapter 13 repayment plan.
Citi is another example, as it will not approve applicants with a history of bankruptcy within the past two years.
5. Focus on the costs
The first thing to watch out for when you compare credit cards is the fees. In practice, it is the inevitable costs that are the problem, such as monthly or annual costs. Late fees, cash advance fees, balance transfer fees, and the like are not a deal breaker, as they’re all fees you can avoid.
The best credit cards after Chapter 7 and 13 bankruptcy are those that charge inexpensive or preferably zero maintenance fees.
How to use a credit card after bankruptcy
If you follow good habits with your credit card, this card activity can help you rebuild your credit. Here’s exactly how to use a credit card after bankruptcy to improve your credit score:
- Make at least one purchase per month. You won’t benefit much from a credit card that you never use. There must be some activity that the credit card company can report to the major credit bureaus. It doesn’t take much – even just one purchase per month works.
- Spend only what you can afford to pay. Even if you have to use your card, don’t overdo it. Make sure you pay off the entire balance each month. This will help you avoid interest charges and avoid credit card debt. It’s also good for your credit utilization rate, which is your card’s balance against your credit limit. The use of credit is an important factor in your credit score.
- Pay your credit card bill on time. Payment history is the biggest part of your credit score. Every payment on time is a positive step for your credit. To avoid a late payment on your credit card account, consider setting up automatic payments or scheduling a monthly reminder in a calendar app.
- Ask the card issuer for an upgrade. Your first new credit card after bankruptcy is unlikely to have many features and you may need to pay a security deposit for it. After six to twelve months of use, contact the card issuer to see if you are eligible for an upgrade. Most good credit card companies will eventually allow you to upgrade to a card with more features. Or, if you started with a secured card, you could switch to an unsecured credit card and get your deposit back.
When recovering from bankruptcy, also focus on building financial security. Budget to find out how much you can spend each month. Also create a savings account with an emergency fund and contribute regularly.
If you do this, you will gradually become more financially stable. Plus, if you use your credit card consistently and pay its bills on time, your credit will recover. It takes time, but eventually you will reach the point where you can qualify for the best credit cards.