What prevents many people from claiming bankruptcy to have a clean slate? The fear that they’ll never be able to secure credit again.
While bankruptcy can make credit more complicated, it’s not the end of the world. As long as you make certain moves, you can slowly build up your credit starting now.
The Effects of Bankruptcy on Credit
Bankruptcy may have long-lasting effects, but they do not last forever. Depending on the type of bankruptcy, it will remain on your credit report for seven to 10 years.
The higher your pre-bankruptcy credit score, the more potential it has to drop. If your credit score was high, it could drop 200-plus points once the bankruptcy becomes official. If your score was low, however, such a drastic drop may not occur.
Several factors are weighed when deciding how much your credit score decreases. The total debt involved and the number of discharged accounts are usually heavily scrutinized, so everyone’s score changes will not be the same.
If your credit score drops drastically post-bankruptcy, don’t fret. Huge drops don’t automatically disqualify you from getting new credit.
Are You Ready for a Credit Card?
Before searching or applying for new credit, you must determine if you’re ready to have it. Required debt counseling post-bankruptcy can make this a more definite decision. Know that bankruptcy will not be an option to clear any new debts, however, for several years.
Credit Cards to Avoid After Bankruptcy
Keep an eye out for certain credit cards that could do more harm than good. You may receive credit card applications in the mail after your bankruptcy. All are not created equal, though.
Many of these cards will have extra-high interest rates and fees. If the card’s interest rate is higher than 25 percent, avoid it. The same holds for any card with a hefty upfront fee, since either could put you in debt quickly.
If high interest rates and hefty upfront fees are your only options when it comes to credit cards, pay off the fee instantly, before the statement even arrives. Also, pay the balance in full every month to avoid the costly interest charges.
Besides cards with high interest rates and expensive upfront fees, avoid applying for any credit cards included in your bankruptcy. Such applications will likely be rejected.
Since each application can ding your credit score, don’t apply for too many at once. If you do, wait four to six months to repeat the process.
Choosing the Right Credit Card Post-Bankruptcy
A secured credit card can get your credit going. It often requires a deposit, and that deposit is used as your credit limit. Over time, you can move on to an unsecured card if your recent history is favorable.
Another option is to opt for retail credit cards. Some of your favorite stores may have these, and they’re often less strict when it comes to approval.
How to Use Your New Credit Cards After Bankruptcy
While you may shun credit cards after bankruptcy, they shouldn’t be seen as the enemy. The right cards can help you rebuild your credit so you can finance a new home or car in the future.
To ensure you don’t fall into the bankruptcy hole again, pay your balance on time and in full every single month. Doing so will help your credit score increase while building solid financial habits.