Getting Credit Cards after Bankruptcy
I firmly believe that one of the first things a person should do after his or her bankruptcy has been discharged is obtain a secured credit card. Here's why.
Bankruptcy is intended to give you a fresh start toward your financial recovery. For most people, this includes re-establishing credit; and the main reason why you should consider obtaining credit cards after bankruptcy is to help you rebuild your credit.
Some people emerging from bankruptcy decide that they never want to have credit again. Well, if that's what you want, then that's fine. But understand that living on a cash-only basis makes it unlikely that you'll ever be able to own a home, a new car, or many other things that simply require that you have credit. Still, if living on a cash-only basis is your choice, then more power to you. Maybe it's the best thing in your particular situation. If you never borrow money again, you can never get into debt trouble again.
But consider this: Even if you don't especially want credit cards, you'll probably want to buy a car, and may want to buy a house, a few years down the road; and those things will be easier if you've already begun to re-establish your creditworthiness. In addition, more and more employers are checking applicants' credit records as part of the hiring process, and you really want some evidence on there that you've been managing your finances responsibly since your bankruptcy was discharged.
Most experts say that having at least one, but not more than four, credit cards with the Visa, MasterCard, or Discover logos is an important part of a healthy credit rating. These should be credit cards, not debit cards. Also, they can be secured cards, but if at all possible, they shouldn't appear on your credit report as secured cards. We'll talk about that in a few moments.
Another thing that's good for your credit is to not be a high percentage of your credit limit on any particular card, nor a high percentage of your combined credit limits. Ideally, both should be kept below 30 percent at the maximum, and less than 20 percent is even better. For example, if the limit on a given card is $5,000.00, then you should try to keep the balance below $1,000.00 at any given time. Using too high a percentage of your credit limit on any given card or on all your cards combined will hurt, rather than help your credit.
Credit Cards that You Should Avoid
A few days after your bankruptcy is discharged, you'll start unsecured receiving credit card applications in the mail. Most of these offers will be from banks that specialize in granting credit cards to people with bad credit, and most of them will be for cards with low credit limits, astronomically high fees, and huge interest rates.
Most of these applications will state that they are "pre-approved" or that you have been "pre-selected" or "pre-qualified" for a credit line "up to" a certain amount that looks impressive, maybe $1,500.00, for example. But when you read the fine print, you'll find that the initial credit line may be as low as $250.00 or $300.00, which is most likely the line you will be granted when you are approved.
In fact, some of the card offers you'll receive will be downright ridiculous, often carrying fees so high that the accounts will be nearly maxed-out before you even receive the cards. For example, while the judge's signature on my discharge was barely dry, I was offered a pre-approved credit card with a $350.00 credit limit that had an "application fee" of $100.00 and an annual fee of $175.00, meaning that before I even received the card, $275.00 of my $350.00 limit would already have been in use. For obvious reasons, I fed that offer to the paper shredder. It barfed for about a week.
When you receive applications like that, you should immediately feed them to your paper shredder. Seriously. They won't help you rebuild your credit very much, if at all. In fact, they'll probably hurt it. Here's why.
- Firstly, these credit cards come from banks that are well-known within the banking community to target people with credit problems, so they're not very respected. If you apply for a loan that requires a manual review, the loan officer will not be impressed.
- Secondly, these cards have credit limits that are so low, and interest rates and fees that are so high, that you'll be using a high percentage of your available credit right from the start. That works against you when calculating your credit score.
- Thirdly, many of these banks use deceptive or manipulative methods to try to get you back into financial trouble, such as absurd hidden fees that are designed to push you into going over your credit limit, followed by more fees levied against your account for doing so, followed by increasing your interest rate to even more astronomical levels after you "default" on your account as a result of the banks' shenanigans.
Why would they do this? Mainly because they know that you can't file for bankruptcy again for ten years, so once you're in default, your options will be that much more limited.
For more information about these scam cards, please click here for my page about how to identify and avoid rip-off credit card offers.
A Better Option: Secured Credit Cards
Instead of accepting a scam credit card offer, I suggest that you apply for a secured credit card as your first card post-bankruptcy. Secured credit cards are not prepaid or debit cards. They're "real" credit cards that are fully or partially backed by a cash deposit in a savings account at the issuing institution. They're a much better option for the recently bankrupt. Here's why.
First of all, the cash deposit provides security not only for the bank or credit union, but for you. If you find yourself in financial difficulty again, you can call the issuer, explain the situation, and ask them to close the credit card and take the money from your security deposit. Your account will be paid in full and in most cases will be listed on your credit report as "Closed by consumer - paid as agreed."
Secondly, approval for secured credit cards is pretty much guaranteed. Some secured card issuers don't even bother doing credit checks. After all, you are securing your debt with cash. So I suggest that you start by saving up some cash -- at least $1,000.00 would be good -- and then visit your local credit union to talk to them before applying for a card from a bank. You'll want to explain your situation (including the fact that you are recently bankrupt), and tell them them you would like to join their credit union with an initial deposit of the amount you have saved, and then use that deposit to secure a MasterCard or Visa credit card.
In my experience, most credit unions will issue secured credit cards even if they don't advertise it; and many credit unions do, in fact, advertise it. Remember: Credit unions exist for their members, not for profit; and helping wounded members rebuild their finances is a big part of that.
Another reason to consider a secured card from a credit union is that most of them don't report the card to credit reporting agencies as a "secured" card. There is no requirement that card issuers do this, and most credit unions don't. On the other hand, most banks that offer secured cards do report them as secured cards. In fact, some banks that issued secured cards only issue secured cards, so the mere fact that you have a card from that bank tells other potential lenders that the card is secured.
How much this matters is debatable, by the way. For FICO purposes, it doesn't matter at all. Secured credit cards are treated exactly like unsecured credit cards for FICO purposes. So if rebuilding your FICO score is what you want to do, then by all means give serious consideration to a secured card. Where it might matter that the card is reported as secured is in cases where your credit application is reviewed by a real person, as when applying for a mortgage or some personal loans. In that case, secured cards may be viewed as inferior to unsecured cards. But then again, they may also be viewed as a sincere and responsible step toward rebuilding your credit. It really depends on the person.
Finally, another reason I prefer credit unions is that most banks tend to treat bankrupt people applying for secured cards like proverbial red-headed stepchildren. They act like they're doing you a favor by even thinking about issuing you a secured card. That's nonsense. A lender that issues a secured card is taking almost zero risk. You're backing up your debt with cash. They should be rolling out the red carpet for you, not treating you like a second-class citizen.
So don't go around begging. You have the upper hand here. Run -- don't walk -- away from any bank that treats you like dirt because you're interested in a secured credit card. If at all possible, find yourself a sympathetic credit union, instead.
Graduating a Secured Credit Card
After a specified period of good payment (typically six months to two years) on your secured credit card, you can ask the issuer to "graduate" your secured card into an unsecured card. If they agree, your deposit will be freed, meaning that it will no longer have a hold against it as security for the card, and that you can withdraw it if you want to. Another possibility is that they will increase your credit limit without requiring an additional deposit, in effect partially securing the card. Or they may do neither. Some banks and credit unions simply will not graduate a secured card, period. If you later qualify for an unsecured card, they'll issue you a new one, but they will not graduate the secured one.
Personally, I think most bankrupt folks are better off leaving their secured cards secured for at least a few years. It guarantees that you can never get in over your head with that particular card: and it never hurts to have money in a savings account, anyway.
Based on my own experiences and my discussions with other people regarding their post-bankruptcy credit experiences, I've observed that the most consistently successful approach to re-establishing consumer credit after bankruptcy is to follow the following sequence.
- Before your bankruptcy is discharged, start saving up money to obtain a secured credit card.
- As soon as you are notified of your discharge, obtain a secured MasterCard or Visa (it doesn't matter which one) from a credit union (preferably) or a bank.
- Use your card, keep the balance low, it and pay your bills on time for at least six months.
- After making the payments on your secured card on time for at least six months, you can, if you like, ask the issuing institution if it can be graduated to an unsecured card or a partially-secured card. If they say no, don't get all huffy and cancel the card. The card is still helping your credit as your oldest open line of credit. So thank them for their consideration and and carry on.
- After a year or so of paying the bills on your secured credit card on time and keeping your balance low, apply for an unsecured "specialty" card like a department store card, a Fingerhut or Gettington account, or a tire company card. They tend to be pretty easy to get, even post-bankruptcy. When you're approved, pay those bills promptly, as well.
- A year to two years after obtaining your secured card, try applying for an unsecured MasterCard or Visa from a credit union or a reputable bank. If you've been making your payments on time, you will most likely get it. The initial limits may be low, but simply getting an unsecured Visa or MasterCard from a reputable institution will be a milestone in your recovery.
What to Look for in a Secured Credit Card
As mentioned, the best cards from the standpoint of rebuilding credit are "bank cards" bearing the MasterCard or Visa logos. Beyond that, some things you should look for in a secured card include:
- A low interest rate. After all, the issuer is taking very little risk.
- Low (or no) annual fees and no "application fees," "monthly maintenance fees," or other such nonsense.
- Monthly reporting to all three credit reporting agencies.
- A 30-day grace period (in other words, no interest if the entire balance is paid within 30 days).
- If possible, the card should be reported as an unsecured card. But as stated above, it's questionable how important this really is. It makes no difference as far as your FICO score is concerned.
Finding a Secured Credit Card
There are many banks (including online banks and credit unions that issue secured credit cards, but oddly enough, many don't advertise them. So the first place to start looking is at your present bank or credit union. Chances are they may offer one, even if they don't advertise it. If you can't find one, here are a few suggestions. Please note that this information is current as of this revision (on January 16, 2017), but it may change by the time you read this page. Please check with the institutions for current information.
This first issuer is only an option for honorably-discharged veterans, or spouses or adult children of veterans who are USAA members. (Siblings of veterans don't qualify at this time.) If you're eligible, then I suggest that you try USAA first because they're just a great outfit to deal with. As their television commercials say, they know what it means to serve.
USAA is best known for being an outstanding insurance company, but they also provide banking services, including both secured and unsecured Visa and American Express cards. I have never held either one because I already have an unsecured Visa from USAA and an unsecured American Express card (yes, it is possible); but everything else USAA does, they do well, and I have no reason to believe that their secured Visa card is an exception. USAA secured cards are reported as unsecured.
Some people have told me that in their opinion, USAA American Express cards aren't "real" AmEx cards because they're issued by USAA, not by AmEx. I'm not sure why that would make a difference if what you want is a secured card with the AmEx logo on it. I'm mentioning it, though, because it seems to matter to some people. I have no idea why.
As an aside, if you're a veteran, then I suggest that you also request an insurance quote from USAA. In my experience, no other company has been able to even come close to their rates, and their reputation for service is among the very best in the industry. Ask your local collision shop what they think about USAA if you don't believe me.
State Department FCU
At the time of this writing, I believe that SDFCU offers the best deal on secured credit cards for most people. They do not require any income verification or credit check, there are no annual fees or balance transfer fees, and the interest rate at the time of this writing is a superb 7.24 percent APR. That's the lowest rate I've ever come across for a secured card.
You will, of course, have to join the credit union. That means that you either have to work for the State Department, be affiliated with one of the bazillion companies and organizations that will qualify you for membership, or be a family or household member of someone who's already a member of SDFCU. The easiest and cheapest way to join SDFCU is probably to join the American Consumer Council for $8.00. That will make you eligible for membership in SDFCU and many other credit unions.
SDFCU secured cards are reported as secured.
Membership in Navy Federal Credit Union is open only to active-duty military personnel, retirees, immediate family and household members of members, and certain government employees. The credit unions is well-known for making no exceptions. Either you're eligible or you're not. But if you're eligible, they offer a secured rewards MasterCard with rates ranging from 9.24 to 18.0 percent, depending on how horrid your credit is.
Although I am not a member -- something for which I kick myself on a regular basis -- Navy FCU's reputation for member service is unparalleled. Unfortunately, I didn't join when I was still in uniform, and now that ship has sailed. (See what I did there? Navy? Ship? Get it?)
Navy FCU secured cards are reported as unsecured.
First Tech FCU
Another easy-to-get secured credit card is the Platinum Secured MasterCard offered by First Tech Federal Credit Union. I used to recommend this as the best secured card for the recently bankrupt, but I no longer do.
My reasons for downgrading my recommendation are, firstly, that they raised the interest rate to what I believe is a somewhat high rate for a secured card (16.25% APR as of this revision); and secondly, that their secured never "graduates" to an unsecured card. You can always apply for a new, unsecured card; but First Tech's requirements for unsecured cards are very, very tough. It's highly doubtful that you'll be approved for an unsecured First Tech credit card with a bankruptcy on your record, even if your FICO is over 700. Don't ask me how I know.
Nonetheless, I still recommend First Tech as an option to consider to obtain a quick and relatively-painless post bankruptcy secured card. I just no longer think they're the best option. First Tech secured cards are reported as secured.
Specialty Credit Cards
Specialty credit cards are non-Visa/MasterCard credit cards issued for use only in specific stores. They tend to be a little easier to get than other unsecured credit cards because they're a bit harder to abuse (because they can only be used in one store), and also because their primary purpose is to make it more likely that you use that particular store. Some examples of easy-to-get specialty cards are the Amazon Store Card, which is issued by Synchrony Bank.
The interest rates on specialty cards tend to be high, but most of them offer an interest-free period following major purchases. Some also offer other benefits such as cash back credits that can be used as statement credits or to purchase more merchandise from the store whose name is on the card. If you already use that store and are confident that you can pay off any balances quickly, specialty cards can be one way to help jump start your financial recovery.
Mail Order / Online Merchant Credit Accounts
There are many vendors who specialize in selling quite ordinary, over-priced products to lower-income working people. Typically, these companies offer fairly easy credit. One old-time example of this sort of company is Fingerhut, one of the oldest mail-order companies in America. Another much-newer one is Gettington, which is owned by the same parent company as Fingerhut and follows a similar marketing strategy, but tends to be slightly less-overpriced than than Fingerhut.
It's been my personal experience and observation that companies like Fingerhut and Gettington want customers to have established at least some positive credit history post-bankruptcy before they extend a credit line to you. They don't want to be the first company to take a chance on you, but they'll consider being the second or third. Once approved, if you demonstrate responsibility by making your payments promptly (or better yet, ahead of schedule), they tend to be pretty generous with credit increases.
That combination of fairly easy approval, combined with generous credit line increases, can make these companies valuable for rebuilding your credit -- if you're responsible about it. My advice is that if you receive one of their offers, accept it, order something relatively inexpensive, and pay it off in two or three payments. Then don't order anything else for a month or two. Chances are, you'll get a credit line increase. Do this several times a year when they have a sale on some item that you actually need, always keeping your credit line utilization at or below the 10 - 20 percent range. Because these companies do report to CRAs, the low utilization percentage should help boost your score.
A lot of card issuers used to target people who had credit problems with cards that had low or no annual fees, but very high interest rates. We used to call those cards "sock-drawer cards" because they were good to throw in the sock drawer and never use. They showed up on credit reports as open lines that weren't being used, which in theory should help one's credit score.
Alas, the banks caught on; and nowadays, almost all bank cards targeted to people with bad credit also come with exorbitant annual fees (in addition to very high interest rates), making them too expensive to throw in the sock drawer. In addition, I suspect that bank cards that have never been used don't help credit scores very much. There needs to be some activity on them for them to be helpful.
Once You Have Credit Cards
Once you have credit cards again, it's important to actually use them -- but not use them too much nor use them recklessly. Ideally, you don't want to use more than 20 - 30 percent of your credit limit at most, and you want to pay off the balances quickly.
How quickly? Opinion is split on that. Some people use their credit cards as if they were charge cards and pay the balances in full every month. From a personal finance perspective that's a great idea, but it may not help your credit as much as you think. That's because banks want to make money, and they make little or none from customers who pay off their bills in full every month. In the banking industry, people who do that are considered deadbeats.
Probably a better tactic is to pay off small balances in full, but spread larger ones over two or three months -- but to never exceed more than 20 - 30 percent of your credit limit on any given card (or on all your cards combined). It's also a good idea to always pay more than the minimum payment, from both a personal finance and a credit-building perspective.
Revised January 16, 2017