Credit Cards After Bankruptcy

…and what you need to know before you apply for one.

credit card

Photo Credit: adamr

You have filed for bankruptcy. Now you are trying to rebuild your damaged credit. So the question remains: should you apply for a new credit card? Upon first thought, the answer might be a resounding “NO!” But in reality, opening a credit card after bankruptcy can actually be a smart move. Credit card users who pay off their full balance each month can quickly build up good credit. The key is to be smart in your usage habits.

If you do opt to open a new credit card post-bankruptcy, only make purchases with it that you would otherwise make with cash or your debit card. In other words, view a credit card as another method of payment for things you can afford. If you could not afford to buy the item with cash or the money on your debit card, don’t purchase it. This will keep you from accumulating too high a balance and getting nailed on high interest charges.

But what if credit card debt was the reason you filed for bankruptcy in the first place? It might be a little scary to go right out and apply for another card. That doesn’t mean it’s completely out of the question. One way to give yourself a bit of a safety net is to wait until you have two months’ salary saved up before you even apply for a card. This will give you a little bit of a buffer and will allow you to easily pay off your balance each month.

If you do decide to open a card, try to go six consecutive months paying off the full balance. If you can do that, continue using the card to reestablish your credit. But if you have even one month where you spend more than you can pay back, stop using the card. You likely have not altered your spending habits from before the bankruptcy and are likely to fall into debt again. Get out before you become so far over your head that you are back in the same position you were in before the bankruptcy.

If you feel you are ready for the financial responsibility of a credit card, don’t just apply for any card. A secured credit card is a great way to go if you’re just recovering from bankruptcy. A secured card means you will be required to put down a security deposit with the card issuer before you can receive the card. You will also want to choose one that sends monthly reports of your payment history to all three major credit reporting agencies so that you can be sure you are actually rebuilding your credit.

Prepaid cards keep you from charging more than you can pay off, but they won’t help increase your credit scores. You can still use them though to help you stick to a spending budget. Just make sure you have a credit card that you make the minimum amount of purchases possible each month so that you can pay it off in full and rebuild that credit.

When using your credit cards, keep your monthly balances low. Whatever your spending limit is, keep your monthly spending to no more than 10% to 15% of that amount. Avoid charging your card up to its limit, no matter what. This type of spending causes people to charge more than they can afford and wind up back in debt.

On a final note, if you do decide to get a new credit card, make sure you wait until after your bankruptcy has been discharged. Do not apply for one beforehand. Taking on additional credit while you are still completing a bankruptcy could jeopardize your case.