Getting credit after bankruptcy is easier than you think. This series of article will tell you exactly what you need to do to get back on your feet after a bankruptcy – without paying the high fees you might expect, or having to struggle to get credit.
Did you miss part 1? Check it out here: Credit After Bankruptcy – How to Get Credit and Manage New Credit Accounts
Once you know that you are ready to begin applying for credit after bankruptcy, you probably have tons of question. Which are the best credit cards to get? Which types of credit will help you rebuild your credit score the fastest? Can you still get a car or a home loan after bankruptcy?
You will most likely not qualify for a home loan, or a car loan (at a decent interest rate) until a couple of years after your bankruptcy. The very best thing that you can do is to start with the steps below.
Step 1: Get a Secured Credit Card
A secured credit card should definitely be your first credit application after bankruptcy, for a number of reasons:
- Secured credit card applications are rarely turned down – even if you have a bankruptcy. This is because you are using your own money to secure the loan, so the bank knows they are covered if you can’t afford to pay your bill.
- Most secured credit cards are designed with credit building features - Generally all secured credit cards report your payments to all three credit bureaus each month. That makes them different than unsecured credit cards where anything goes. Some unsecured cards report to the credit bureaus when you pay on time, some only report when you are late. So, you want your first credit card after bankruptcy to be one that does report positive payment each and every month to all three credit bureaus. It’s the only way to raise your credit score as quickly as possible.
- Unsecured credit cards usually do not have application or membership fees - Most unsecured credit cards have high “one-time” fees, monthly fees and membership fees that are automatically charged to the card. This makes it look like your credit limit is nearly maxed out the first month that you get the card. That’s terrible for your credit score! So, if you start with an unsecured credit card, you have your full credit limit available when the card arrives in the mail.
- You can set your own limit with a secured credit card - Most secured credit cards allow you to deposit more money any time that you want to raise your own credit limit. This is one of the biggest benefits of a secured credit card. The higher you can raise your limits, and the lower you keep your balances, the more your credit score will improve.
- Secured credit cards have better interest rates than unsecured credit cards for people with bad credit - Since you are just coming out of a bankruptcy, and are learning the best ways to manage credit you may need to carry a balance from time to time. With a secured credit card, you’ll pay around 10%. With an unsecured credit card right out of bankruptcy you can expect to pay at least 24% interest each month.
- Most secured credit cards automatically turn into unsecured credit cards after a couple of years - and you’ll get your initial deposit back!
So, whenever possible, make getting a secured credit card the first thing you do after your bankruptcy. You can put in a credit application on the day that your bankruptcy is discharged if you want to, you don’t have to wait. If you want to know more about secured credit cards, and read our reviews, check out our secured credit card page.
If you don’t have a large amount of money to put up as a deposit on a secured credit card, you can also check out prepaid credit cards. They are a little more flexible, and you can pay a small fee monthly for them to report your information to the credit bureaus, so they can still help to raise your credit score.
Step Two: Use a CD to secure a personal loan from your bank
Basically you are going to want to use a Certificate of Deposit as collateral for a personal loan at your bank. Then, you take the loan money, put it into your savings account (do not spend it!) and make your payments on time each month. This gives you a record of a personal loan on your credit report, and also shows your on-time payments.
In order to repair your credit score quickly you have to have loans of different types – not just credit cards. This step is especially important if you are not already making a house or a car payment. If you do have a mortgage or auto payment, this step is still a good idea because it gives you one more monthly record of an on-time payment. That is what is going to raise your credit score!
We have full step-by-step instructions for how to do this in our article : Credit Repair Tricks: Using CD’s and Personal Loans to Raise Your Credit Score
There is a downloadable walkthrough at the end of the article, so if you want you can print it out, and use it as a guide.
Step 3: Get an Unsecured Credit Card
If you use a couple of secured credit cards for about a year, and you get a personal loan from your bank you are going to be in a good position to start applying for unsecured credit cards in about a year.
If you do not want to wait to apply for an unsecured credit card, you can always apply for a sub-prime (“bad credit” credit card) any time you want. However, be aware that the fees can be pretty high, so research your cards well before applying.
If you take the two steps above, and you make all of your payments on time for about a year, you should qualify for a regular (not sub prime) credit card. Be sure that you check your credit scores before applying for anything though, so that you do not get rejected if your credit score is still too low. Ideally, you are going to want to see a credit score very close to, or above 600 before trying to apply for a regular unsecured credit card.
The easiest types of unsecured credit cards to get approved for are actually department store credit cards. After my own bankruptcy Target was the first place to issue me a regular credit card. a couple of warnings though:
- Don’t apply for too many department store credit cards - Each credit application will lower your credit score slightly, so just pick the store that you like best, and apply there.
- Department store credit cards usually have high interest rates (around 24%) so don’t carry a balance on it unless you absolutely have to.
- Read the fine print carefully before you apply for anything. In particular, look to see whether or not the company will report your payments to the credit bureaus each month. If they do not, there is very little reason to have the card.
Step 4: Get a Regular Visa or MasterCard –
There are three excellent credit cards out there designed specifically for people with improving credit. When you are approaching a credit score of around 650, you might want to consider applying for one of these cards. You can read detailed reviews of each of those three cards on our Fair Credit Credit Cards page.
Just remember that as you take these steps there are two important things that you must do each and every month.
- Make your payments on time – Whatever you have to do, do not be late or miss a payment – if you do it will be devastating to your credit score.
- Do not carry a balance on your credit cards – If you carry a small balance your credit score may still go up, but paying off your cards each month is they best way to make your credit score go up as fast as possible. Carrying a high balance on your credit cards (close to the limit) will actually lower your credit score.
Part three of this series will talk about how to get a car loan after bankruptcy, and part four will discuss getting a home loan after bankruptcy.
You are also invited to check out our forums, where you can discuss the bankruptcy and credit-building process with other readers who are doing it too.
See you soon!
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