Bankruptcy has different causes. For some, credit card debt goes out of control. For others, a medical event or job layoff sends the budget into a tailspin. The one common thread is that there wasn't money to pay the bills. Life after bankruptcy invariably means living on a leaner budget.
It also means finding a new credit card – and the pickings are lean. Bankruptcy puts a negative mark on a consumer's credit file for at least seven years. How negative depends on several factors, including where the score stood before the bankruptcy. Anecdotal evidence suggests that bankruptcy drops the score to the mid-500s (530-560). Credit opportunities are severely handicapped during the time it takes to rebuild healthy credit.
Credit Card Offers – Now?
To the great surprise of many consumers, credit card offers reappear in the mailbox within weeks following the announcement of the bankruptcy (it is a public record and published as such). A prime reason is that the consumer is not eligible for another discharge for two to eight years. Therefore, newly acquired debt must be paid. For the creditor, the offer is almost risk-free.
Even so, the first cards offered will almost invariably secured credit cards. In other words, a cash deposit is required and credit is limited to the amount on deposit. Charges are not deducted from the deposit, however; this is not a prepaid card. Instead, as with any other credit card, charges appear on a statement and the bill must be paid. The deposit is only tapped in case of default.
Terms on credit products offered to newly discharged debtors are less than attractive. That said, the journey to recover a good credit score begins with the first step. Some credit cards actually help consumers begin to reestablish a solid credit history.
Not all secured cards are created equal. They differ in fees, interest rates, grace periods and reporting policies. Even after a bankruptcy, some offers are considerably better than others. Here's how to tell which are worth considering.
Some credit cards are quite expensive to own. First Premier Bank MasterCard Credit Card, a secured card, has been held up as among the most costly cards on the market. For starters, there's a $75 fee just to process the application. This is in addition to a $75 annual fee for the first year ($45 per year starting in the second year). The cardholder also pays a monthly maintenance fee of $6.25 starting in the second year just for the privilege of owning the card.
Almost any other secured card is a better option.
Harley Davidson offers a secured Visa with no annual fee. Digital Federal Credit Union (DFCU) offers the DCU Visa Platinum Secured Credit Card with no annual fee and fee-free cash advances and balance transfers. (That said, cash advances and balance transfers are two steps to avoid if at all possible when you're coming back from bankruptcy. See 8 Alternatives To A Credit Card Cash Advance and The Pros And Cons Of Balance Transfers.)
For the most part, don't focus much on the interest rate. Even if it's sky-high, it should not matter because a bankruptcy survivor needs to learn – now – how to avoid falling back into debt. When it comes to a credit card: Use it, pay it off. Use it, pay it off. Use it, pay it off. Focus on other factors. If all else is equal, it's fine to choose the card with the better rate, but don't plan to carry a balance. Ever.
A grace period is the number of days during each billing cycle that an account does not incur any interest charges. Only accounts that are paid in full every month can benefit from the no-interest period. Once there is a balance on the card, interest accrues on each purchase from the date of the transaction. Many secured cards do not offer any grace period at all.
The USAA Secured MasterCard and the DFCU card, above, both come with a 25-day grace period.
A consumer's credit will never improve unless creditors report a positive payment history to one or more of the three major credit reporting agencies: Equifax, Experian and TransUnion. As an added bonus, many secured cards report as unsecured (more favorable to the consumer).
Secured credit cards that don't report cannot help the consumer rebuild healthy credit.
Capital One's Secured MasterCard reports to all three agencies.
The Bottom Line
Any of the cards mentioned above (except First Premier) are great choices for bankruptcy survivors. The features to look for: low fees, reasonable interest rates, grace periods and credit-bureau reporting. Call the toll-free phone numbers on the websites to find out the exact terms prior to applying, because they change periodically. For more information, see Getting A Secured Credit Card and Credit Cards For People With Bad Credit.
And realize that consumers don't have to stay in secured-card limbo forever: After they demonstrate responsible use (on-time payments) for a period of time (typically six to 12 months), they can apply for an unsecured card and request return of the security deposit.