Credit cards after bankruptcy are scary. A new credit card may mean playing with the same fire that just burned you. However, credit cards are a great way to build a credit profile and recover quickly after bankruptcy. But which one? And when should you apply?
Credit Card Basics
Comparing credit cards essentially comes down to the terms of the cardholder agreement (the contract between you and the bank):
• The credit line or credit limit is the total amount you may charge on the credit card account.
• A secured credit card will grant the cardholder a credit line equal to an amount placed on deposit with the bank. In other words, you deposit $500 into an interest bearing account and the bank gives you a credit card with a $500 limit that is secured by the deposit. Naturally, unsecured credit cards are not secured by anything.
• The annual percentage rate (APR) is the interest charged on balances. Sometimes the APR changes to a higher rate if you pay late, charge beyond your limit, or take a cash advance. The APR may be fixed or variable. Fixed rate APRs have consistent interest rates. Variable APRs are tied to an index, like the prime lending rate, which changes over time.
• The interest calculation method should be examined. Interest is usually calculated by averaging the daily account balance and multiplying that figure by the “periodic rate” (APR divided by the number of days in a year).
• Some credit cards grant the customer a grace period which omits an interest charge if the balance is paid before the grace period expires.
• Some banks have creative fees to charge cardholders, such as fees for cash advances, balance transfers, paying late, exceeding your credit limit, and annual fees. Other bank have very creative fees, such as application fees, set up charges, dormant card fees, online account management, and even terminating the account.
The Best Post-Bankruptcy Credit Card
In a perfect world this article would point the reader to a credit card with 0 percent APR, gives cash back for purchases, airline points for travel, and has no fees. Since we all live in the real world, here is some practical advice:
1. There is no perfect time to apply for a credit card after bankruptcy. Many bankruptcy debtors report receiving credit card offers, some even before the case is closed.
2. Most credit experts recommend charging a small amount on your cards each month, paying regularly, and keeping the card at zero or less than a five dollar balance. Used this way, the effect of a high APR is negated.
3. Examine the terms of a cardholder agreement closely for fees. If you have questions, or want to compare agreements, the Consumer Financial Protection Bureau maintains a credit card agreement database with agreements from more than 300 card issuers.