Some individuals refuse to have credit after bankruptcy. Believe it or not, paying your monthly bills, using cash, saving money, and acting in a responsible manner does not make you a good credit risk. A great example is the person who has worked the same job for years, earns a good wage, pays his bills on time, and has not had a single negative item on his credit report since filing bankruptcy six years ago (which was caused by unforeseen medical bills). Without re-establishing his credit, this man cannot get financed for a new or used vehicle through any reputable bank or captive finance company such as Ford Motor Credit.
On the other hand, running up credit debt immediately after bankruptcy is an equally wrong approach. It is important to select the right type of credit and use it responsibly. Credit cards are a great way to re-establishing credit, and selecting the right kind of card is a good first step on the road to financial recovery.
Secured vs. Unsecured
One of the first questions to answer in selecting a credit card after bankruptcy is whether it is secured or unsecured. An unsecured card does not have collateral pledged to guarantee payment. A secured credit card requires a deposit of money that is held by the creditor. The creditor will then extend credit equal to the amount deposited (in some cases more). A secured credit card looks and acts just like an unsecured credit card. Both secured and unsecured cards charge interest on any outstanding balance and can incur fees for late payment, over the limit spending, etc. When a secured account is finally closed (or converted, see below), the cardholder’s deposit is returned.
Interest Bearing Account
Most secured credit cards have interest bearing accounts for secured credit card deposits (often required by law). Many of these accounts are insured by the FDIC, and some banks offer better rates of return on these deposits than others.
Secured Card Convert to Unsecured
If you choose a secured card to re-establish your credit, you may be interested in how the creditor will treat your account in the future. Some card companies will periodically review secured cardholder accounts, convert the secured account to an unsecured account, and return any money held. In some cases conversion is guaranteed, but may only be “available” from other lenders.
Report to Credit Bureaus
Perhaps the most beneficial feature for having a credit card after bankruptcy is the bank’s promise to report monthly payments to the three major credit reporting bureaus (Equifax, Experian, and Trans Union). Not every bank or credit card company reports to all three credit bureaus, especially if the cardholder has paid the card off in full each month before interest is charged.
The annual fees charged by credit card companies can vary widely. Many offer no annual fee, at least for a time. Be aware that if you decide to close your credit card account at a later date because of high annual fees, your credit score may be adversely affected (since a credit score is adjusted by the length of the individual’s open credit accounts). So choose your credit card wisely!
Interest from credit card companies are presented in different ways. The card may have a low introductory rate, which may jump substantially after a few months. Other rates may fluctuate with the economy (or at the creditor’s election), and still others are fixed. It pays to review the credit card terms and determine the rate of interest before agreeing to a card offer.
Application and Set-Up Fees
Most reputable credit cards do not have application fees or set-up fees. Some debtors report receiving unsecured credit card offers immediately after filing bankruptcy. These offers often extend low available credit, but contain high application and set-up fees. A debtor may be given a $250 credit line, but have $180 in fees! Essentially, you are taking a loan from the credit card issuer and not receiving anything in return.