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After bankruptcy, a secured card revives your credit

Erica Sandberg

February 9, 2016

Q  Hi Erica,

I did a Chapter 7 bankruptcy in 2013, and I got rid of more than $30,000 in credit card debt. Why I filed is complicated, but it was not my fault. Anyway, I was left with $20,000 in student loans that I have just now paid off. I never missed paying and actually paid the balance six months early. Can I get a credit card again, since I always made my student loan payments? I’m not sure if that counts toward my credit. — Leo

A  Dear Leo,

The Chapter 7 bankruptcy and whatever delinquencies that may have preceded it dealt your credit rating a hard blow, yet without question your activity with that student loan has softened the punch. Presuming you have a secure job that pays well, I see no reason why you can’t get a credit card.erica-box4

Be aware that the bankruptcy will appear on your consumer credit reports for a full 10 years from the date of filing. The damage is most extreme in the first two years, as credit scores (such as the FICO) weigh recent activity higher than what you did long ago. As the notation ages, its impact wanes.

You did a smart thing making regular payments on your student loan. You student loan is boosting your credit scores, and that’s offsetting some of the bankruptcy’s damage.

Payment history is the most important factor in a FICO score. Since you adhered to your student loan due dates, the lender has regularly sent evidence of your on-time payments to the credit reporting agencies.

Credit utilization is the second most important scoring factor. Since you’re no longer in debt, the paid-off loan has helped your scores.

Now, on to getting a card so you can charge again while also giving your credit rating a much needed boost…

Check your credit scores to see what they are today. If your FICO scores are still under 600, your card options will be limited to those for people with bad or perhaps fair credit ratings. That’s OK, as you need to start somewhere. A secured card, in which your deposit lessens the risk for the issuer, is a terrific credit re-starter. Compare secured cards, looking for the best card (low or no fees) in your scoring category. With a steady income, you should be approved, and you can start to charge again.

If you use this new card well for a year, you can probably qualify for a regular unsecured card. Using two cards in rotation, never skipping a payment cycle and always maintaining a zero balance, your credit rating will improve. Then when the bankruptcy notation drops off your credit report, all that will remain will be evidence of your positive repayment behavior. Then your scores should be in excellent shape.

A note though: You implied your bankruptcy was out of your control. Yes, sometimes that can happen. High medical bills, unexpected unemployment and other uncontrollable financial events can lead even the best of money managers into ruin. But try to plug as many of the financial holes as you can so history doesn’t repeat itself. You can’t file Chapter 7 bankruptcy again until 2021, so you’ll be stuck with any debt you incur.

I urge you to use this time to save money aggressively, so if bills do come up, you can pay them with cash. Get the right health insurance, charge only the amount you are certain you’ll repay in time and in full. If financial trouble does erupt, attack it early and aggressively — get a second job, downsize spending, and call creditors to ask for assistance before going delinquent.

Got a question for Erica? Send her an email.

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