Get answers to questions about this important post-bankruptcy tool.
A Chapter 7 or Chapter 13 personal bankruptcy can provide very valuable debt relief, but this relief does come at a cost. The bankruptcy filing will appear on your credit report for up to 10 years, marking you as an unreliable borrower and depressing your credit score significantly. Fortunately, there are ways to help your credit recover faster following a bankruptcy. Getting—and using—a secure credit card is one of them.
What is a secured credit card?
A secured credit card works just like a regular credit card, except your credit limit is determined by the amount of cash you have placed as collateral in an account with the bank issuing your secured credit card. For example, if you have placed $500 in the account, you can spend up to $500 on your card. Over time you may add more cash to the account and eventually if your credit improves enough the card issuer may advance additional credit without collateral.
Why do I need a credit card at all?
For individuals who have wound up in bankruptcy court, it can be very tempting to want to avoid any and all future debts. Unfortunately, while a cash-only plan may help you live within your means, it will not help improve your credit score. You must acquire a line of credit and use it responsibly in order to improve your credit score. Plus, you will find that many normal activities like booking a hotel room or a plane ticket require you to have a credit card. Following bankruptcy you may not qualify for a regular card but you can get a secured credit card.
How do I choose a secured credit card?
You can find many lists of secured credit card issuers online with a simple search. From there you will want to request information about each specific card and make sure you read the fine print. Some specific points to consider in your decision include:
- Amount of any application fee
- Any required extra fees such as insurance
- Interest rate
- Whether the card issuer will flag your account as a secured card on your credit report—this may make it harder to rebuild credit.
If you are a member of a credit union, start your search there. Credit unions often offer excellent cards for members that have lower interest rates and no annual fees.
How should I use my secured credit card?
You should use your secured credit card every month, but only spend about a third of your credit limit. Always pay the bill in full as soon as you receive it. Continue using your card for 1 to 2 years or until you have achieved enough of a boost in your credit score to qualify for a regular card with no annual fee and better interest rates.
When will I see results in my credit score?
Many individuals report that their credit improved significantly after 1 year of using their secured credit card.
