Managing credit cards after bankruptcy can be a tricky matter. Some individuals are so fearful of going through bankruptcy again that they avoid using credit cards at all; however, this is not an effective way to rebuild credit after bankruptcy (which is a goal you should work toward after receiving a bankruptcy discharge). Other individuals jump back into credit without a clear idea how to manage credit wisely. This article is for all of those individuals, as well as those looking for some guidance and advice on how to manage credit cards responsibly.
Managing credit cards after bankruptcy is something that all debtors need to learn how to do in order to rebuild their finances and credit rating. Credit is a part of our financial life and, at some point, you will rely on your credit health (i.e. when you purchase a home, buy a car or pay for something in an emergency). Even if you manage never to need credit again, managing credit wisely is essential for rebuilding your credit rating so that you have the option of using credit in the future.
The first step in handling credit cards after bankruptcy discharge is to request a copy of your credit report. You should review each account on your credit report to ensure that the information is accurate. All debts discharged by bankruptcy should reflect a zero balance owed and note that the account was included in bankruptcy. If you chose to reaffirm debts, those debts should reflect a current payment status (paying all future payments before the due date also helps improve credit scores). Notify the credit reporting agency of any errors and request that they correct them immediately (you may also be required to contact the creditor to correct erroneous information).
Do not rush to close credit accounts that had a zero balance and remain open after the bankruptcy. Closing accounts with an established history can actually hurt your credit score. If all of your credit accounts were closed due to the bankruptcy, you should consider opening new credit accounts as a way to repair your credit rating and establish a fresh credit history. When opening new credit accounts, some credit card types are better than others to have after a bankruptcy discharge has been received.
Good Credit Cards vs. Bad Credit Cards to Have After Bankruptcy
Managing credit cards after bankruptcy begins with choosing the best credit cards that will help you rebuild your credit rating, while giving you an opportunity to strengthen your financial skills. Several options are available, including:
- Prepaid credit cards – Prepaid credit cards are a safe way to rebuild your credit after bankruptcy. You “purchase” credit by prepaying the account so that you can only “charge” money you have already spent. This helps you learn to work within your budgets and get into a habit of spending less than you are earning each month.
- Secured credit cards – Once you have mastered spending within your budget limits, you should move to secured credit cards. You must deposit an amount with the credit card company to secure your charges; so, in the event that you fail to make the monthly payments, your creditor can take possession of whatever was secured against the card. The benefit of a secured credit card is that the company reports your on-time payments to the credit reporting agencies, which helps rebuild your credit score.
- Standard retail credit cards – Retail credit cards are typically easier to obtain than bankcards after a bankruptcy. The good news is, retail cards give you the same benefits as bankcards because they allow you to purchase items on credit, make timely payments and improve your credit score. You may be required to pay a higher interest rate at first, but as your credit rating improves, you can request reductions in the interest rate.
- Rewards credit cards – Once you have improved your credit score and you qualify for bankcards with a lower interest rate, consider your bankcard options. However, do so with caution. Look for a credit card with a low interest rate, no annual fee and some type of rewards program. A Rewards Program that offer you cash back on daily purchases (i.e. gas, groceries, etc.) is a good way to get some of your money back, while rebuilding credit. I recommend keeping your balance below 30% of the credit limit and making all payments on time (this is a must!).
In order to manage credit wisely after bankruptcy, you should avoid the following credit cards:
- Charge cards – The terms “charge cards” and “credit cards” are often used interchangeably; however, these are two very different types of credit accounts. Charge cards require that the balance be paid in full each month. If the balance is not paid in full, you will incur late fees and other penalties. It is very easy for cardholders to get into trouble with charge cards because if they are unable to pay the full balance one month, they will pay hefty penalties and their credit will be tarnished.
- Subprime credit cards – Subprime credit cards are used by individuals who have less than desirable credit scores, but they come with a hefty price - - high interest rates. The companies charge extremely high interest rates to offset the “risk” of lending money to individuals with low credit scores and poor credit histories. Another disadvantage of subprime credit cards is the fees charged by the companies. These fees can quickly add up when you take the annual fee, account-processing fee, program participation fee and account maintenance fee into account. Generally, cardholders are already in debt before they make their first purchase with this type of credit card. Rather than pay these fees, opt for a secured credit card.
First Step for Solving Debt Problems
If you are experiencing overwhelming debt, you are not alone. I help people every day begin the process to recover from debilitating financial crises and gain a fresh start. If you would like to talk with someone about your debt, request a free bankruptcy consultation (even if bankruptcy isn’t your solution) and we can help you assess your situation and determine which solution is best.