Credit Cards after Bankruptcy

Bankruptcy has the most detrimental effect on your credit rating. One of the most important things you need to do after bankruptcy is to start to rebuild your credit rating. Particularly in the wake of the sub-prime scandal, banks have become more wary of who they give credit to.

However, obtaining credit cards after bankruptcy is not impossible, but you will find that you need to adopt a new approach and attitude towards credit cards, particularly if they were a major contributor to your bankruptcy in the first place.

Given the 2005 changes in the Bankruptcy laws, periods between filing for bankruptcy have been extended by 2 years to 8 years in the case of Chapter 7 filing and 6 years in the case of Chapter 13. This removes part of the risk to lenders when it comes to extending credit to those with problem histories. In addition, consumers, as another result of the 2005 changes, have to undergo a “means test” to determine if they can afford to repay their debt, albeit under fairly harsh terms, and if so, enforcing a Chapter 13 filing.

Also, due to a lack of usury law in certain states, credit card companies are free to charge high levels of interest to those with a low credit rating, thereby balancing their perceived risk.

Bottom line is that credit cards after bankruptcy will inevitably come with a high interest rate.

It’s also worth bearing in mind that if you receive mailings from credit card companies after a bankruptcy discharge, it may simply be that they haven’t updated their database yet, so don’t assume you’ve received it because they want your business.

That said, one of the best ways to rebuild your credit rating is through the use of credit cards, however, as previously mentioned, your attitude towards them may have to change. Before you even approach an issuer, you must make the decision that any future credit card you have will be paid off IN FULL every month, and that you will not use the card as a way to borrow money. This is one way you improve your credit rating, and is vitally important. Banks and credit card issuers need to see that you can handle money and credit responsibly.

Do you know that applying for, and then being refused a credit card has an adverse affect on your credit rating? Here are some things you can do to minimise the risk:

1.  Don’t apply directly for a credit card. Instead, approach the card issuer and ask them what their policy is on applications from discharged bankrupts. This will give you a feel, or even a definite answer as to whether or not that issuer will grant you a card. With no formal application made, your credit rating will remain unaffected if you are refused.

2.  Apply for the worst rate card you can find. Remember, you’re trying to get your foot back on the credit ladder. You are more likely to be accepted for a card with an astronomical rate.

3.  Get a secured credit card. This works by depositing a sum of money equal to your credit limit. Your limit on your card is then restricted to the amount you have deposited. You may be wondering what the point is – if you have the money why do you need the card. Remember, you are going to pay the balance off every month. This method allows you to repair your credit rating, even though your credit card may seem pointless – it’s a positive start. However, you should be aware that credit history on a secured card is not always reported to the credit agencies, and if it is it can have a detrimental effect as a secured card. What you want is a credit card issuer who will report the card to the agencies, but not to state it is a secured card.

Finding unsecured credit cards after bankruptcy is by no means impossible, but you will have to do your research, accept a poor interest rate, and regard it as a means to an end, ie a first step on the road to rehabilitating your credit rating.