So you've filed for bankruptcy. You know that the filing will stay on your credit report for at least seven years, and that your credit score's taken a hit. But when can you apply for a credit card once you've gone through the bankruptcy process? The answer has more to do with you than your bank.
If you're worried you might dig yourself into a hole...
While building credit is important, you won't be able to raise your credit score if you're still struggling to pay off your balance. A big part of your credit score is your "credit utilization ratio," or how much debt you have compared to your overall credit limit. Normally, you'd want to keep debts under 30% of your limit. After a bankruptcy, you may want to set your ceiling around 15%. For example, if you get a credit card with a $500 limit, you should keep the balance under $75. This can be tough when you have a low limit. If you're worried that access to a credit card will just end with you back in bankruptcy court, it's okay to take a pass for now.
If you're sure you won't get into debt again...
If you trust yourself not to rack up credit card debt you can't repay, you can start rebuilding your credit score as soon as you're done filing for bankruptcy. Your FICO score can affect your ability to acquire loans, get approved for an apartment rental and even find a job. The sooner you can reconstruct your credit, the better.
Getting a credit card after bankruptcy might seem counterintuitive, but it is the quickest and easiest way to improve your credit. Lenders want to see you can spend responsibly and make timely repayments. A credit card is a great tool for demonstrating your trustworthiness.
When you get your credit card, proceed with caution. You should use it regularly, but you need to be very careful to spend only what you can afford. Pay off purchases quickly and avoid carrying a balance month to month. When building credit, a good strategy is to use the card only for items you need to buy anyway. Groceries and gas are good examples. Pay for them with your credit card and pay them off before the grace period ends.
Post-bankruptcy credit cards
In the months following a Chapter 7, you'll have trouble getting approved for a decent credit card. You'll have to start with an option for bad credit and work your up the ladder. This often means applying for a secured credit card.
A secured credit card is different from a regular (unsecured) credit card in that it requires a security deposit. Usually, the minimum deposit is around $200-$300. How much you put down will determine your credit limit. Basically, you're borrowing money from yourself, so the card is issued at no risk to the lender. You're almost guaranteed approval. When you eventually qualify for a better card and close your secured account, the deposit will be refunded in full as long as you've kept up with payments and stayed under your limit.
We recommend taking a look at the Digital Federal Credit Union secured credit card. Rare among secured cards, it has both no annual fee and a low APR - an ongoing rate of 11.8% interest (though you shouldn't be carrying a balance anyway. You can join Digital Federal with a $10 donation to the nonprofit Reach Out for Schools.