If you’ve recently had a bankruptcy discharged, your mailbox may be filling with new credit card offers.
Although it seems counterintuitive, some companies actually seek out and market their cards to recently bankrupt individuals. That may be due in part to the fact that once you’ve declared bankruptcy, the law limits how quickly you can do it again, up to eight years in some cases.
However, just because you can get a credit card after bankruptcy, should you?
Using credit cards to rebuild a credit score
One of the best reasons to get a credit card after bankruptcy is to improve your credit score.
Your credit score is based upon several factors, including your payment history as well as how long your accounts have been open. Therefore, it can make sense to apply for a credit card immediately after bankruptcy to begin re-establishing your creditworthiness. However, be sure you wait until after your discharge is complete before submitting any applications.
Once you get a credit card, go ahead and use it to charge a reasonable amount of purchases each month. Since post-bankruptcy cards can carry hefty interest rates, you won’t want to carry a balance. Instead, only charge what you can pay off each month.
It’s important to keep an eye out for and stay away from subprime cards targeted at individuals with bad or limited credit. The hefty fees and high interest rates of some of these cards will eat away at the already small credit limit these cards offer.
What you should know about secured credit cards
Credit cards for bad credit and credit cards for limited credit are typically secured. That means you pay a deposit to the company before the card is issued, and that deposit is your line of credit. In addition, they may have an annual fee and higher interest rates than those offered on other cards.
While the terms may not be as appealing as those offered on unsecured cards, don’t discount them completely. Issuers of secured credit cards will report your payments to credit bureaus and help boost your credit score the same as other cards. However, as with other credit cards, compare several options to be sure you are getting the lowest fees and interest possible.
And although they may appear similar, don’t confuse secured credit cards with prepaid cards. Except in rare instances, prepaid cards don’t report to the credit bureaus and won’t help your score.
Why you might think twice about credit cards after bankruptcy
Individuals file bankruptcy for a variety of reasons, from unemployment to medical emergencies to overspending. If overspending is what led you to bankruptcy court, you may want to carefully consider whether to apply for a new card.
Credit cards can be powerful tools to rebuild your finances, but they need to be used responsibly. Be honest about your ability to limit your spending and pay off your balance each month.
If you aren’t sure, try to secure a card by self-funding a low credit limit. A low-limit card may help you test the waters without letting you get in over your head. If you reach a month where you can’t pay off the balance, put the card away until you can.
Bankruptcy can be a stressful experience and most certainly will impact your credit score. However, it isn’t permanent, and your credit can be salvaged.