I get excited for bankruptcy clients who are eager to rebuild their credit after filing a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, and so we are sure to discuss secured credit cards. After bankruptcy, clients want to avoid credit traps and living beyond their means. They are placing a high value on their peace of mind and living within their budget, and they know all too well the anxiety associated with being over-extended.
In order to rebuild credit, we need to demonstrate our ability to successfully play the “credit game.” This means we show banks that we are only going to use credit when we reasonably think we will be able to pay off an item in the next month, or consistently make payments on an item over time. So rebuilding credit does require getting back into the credit game. Secured credit cards are a key part of that.
Secured Credit Cards
Secured credit cards are the place to start. A secured credit card requires the borrower to place an initial deposit of $300 to $500 with the bank. That deposit then becomes the credit line. If it sounds like you’re borrowing from yourself, that’s ok. Remember, the point of this is to demonstrate to banks that you are going to use credit responsibly.
Typically, after a bank sees that you’ve used the card consistently and made payments consistently they will extend you an unsecured credit card. This takes about a year. It’s also a great year for you because on the heels of filing bankruptcy, you are demonstrating to yourself that you are operating within your budget.
What To Look Out For
Mainly, when it comes to secured credit cards, you want to examine the fees. Some cards have application fees. All cards have annual fees. The cards can be fee heavy, so it’s worth it to seek out the lowest fee card and do some research. Make sure you are asking not only about fees to get started, but what fees you will see over the course of the year—some cards make it a requirement that you purchase insurance through them but you might not know that until it shows up on your bill a few months into the agreement. Again, find out the fees before committing.
Bankrate.com has a list of secured credit card options. If you are a member of a Credit Union, check with them because some Credit Unions offer secured credit cards to their members.
Rebuilding Your Credit
Buy a few things on the card each month and pay them off each month. Remember that you’re using the card to rebuild credit, not to enable the purchase of items you can’t afford in the moment. So it’s best to already have money set aside for the item you are purchasing, but to choose to pay for it with the credit card. Then, when the bill comes, you pay it back down to zero.
If you have questions about a secured credit card or would like to discuss your options in bankruptcy, email me at [email protected] or call 704.749.7747 today. I’m a Charlotte bankruptcy attorney and I’m here to help.