Editorial Policy

After Bankruptcy, Ease Into Credit World Slowly

Erica Sandberg

January 8, 2013

QDear Erica,

I just finished with Chapter 7 bankruptcy and want to start rebuilding credit. Which credit card should I apply for? — Susan

AHi Susan,

What a relief! I'm sure it must feel good to finally be done with the bankruptcy process. But now you want to charge back into the credit world so soon? While you'll probably have little trouble doing so, I'm going to encourage you move slowly. Dip your toe back in the credit water cautiously instead of plunging in headfirst.

Many credit issuers are ready and willing to provide accounts to people who have recently discharged their debts. That may sound odd, but it really does make sound business sense. After all, you've rid yourself of balances that were holding you back from spending and borrowing. Now, assuming you have an income, you can meet your important expenses again and possibly even afford to buy other things that you previously couldn't.Ask Erica

Even better for a credit issuer, though, is that you'll be forced to pay back everything you charge from this point forward. A Chapter 7 bankruptcy won't be an option for you for another eight years. You're stuck with any balances you run up, so you've got to make sure you use the card well.

If you do decide to get a card, cards designed for people with damaged credit are a good place to start. That's because “damaged credit” is what you have now. And, most likely, it's not just the bankruptcy notation showing up in the public records section of your credit report that's dragging your credit down. I'd be willing to bet that your credit rating was very low before you filed. Most people who take the legal route out of dodge do so because they have seriously delinquent accounts, overwhelming balances and accounts in collection, or because they have been sued and now owe strangling monetary judgments. All of those problems are extremely damaging to a credit rating. A bankruptcy doesn't help matters, but if your scores were already scraping the bottom, well, there is only so far they can go after that.

Now, back to the acquisition of new plastic: When you begin looking at offers for people with bad credit, you'll see that the accounts that you're eligible for are quite different from those for people with excellent credit. The majority will be secured accounts, where you put money down as collateral, and prepaid accounts, which act more like debit cards. With prepaid cards, you fill the card up with cash (for a nominal fee) and then “charge” with them.

Of those two options, I'd suggest going for the secured account, because, unlike with prepaid cards, the issuer will send your activity with the card to the credit reporting bureaus. With long and responsible use, you can rebuild your credit. The bankruptcy notation will appear on your credit reports for 10 years, but the negative impact will be diluted with positive behavior.

Now, you may also be able to get an unsecured card, but I implore you to read the terms carefully before applying. Because there is vivid evidence that you did not pay your creditors back the first time, you're considered a risky customer. Many of those unsecured accounts will come with expensive additional fees and strict restrictions.

Whatever credit card you get, charge a tiny amount in the beginning, and pay it back in full before the due date. Remember: Bad habits are hard to break and good ones take time to form. You don't ever want to be stuck with looming liabilities again.