Look into secured cards designed to build or rebuild your credit after filing for bankruptcy.
Bankruptcy can have long-term effects on your credit score and makes it harder to obtain credit cards and other loans. But it’s possible to get a credit card post-bankruptcy if you work on improving your credit over time.
Read on to learn more about what bankruptcy is and how it affects your ability to get future credit cards.
What is bankruptcy?
Bankruptcy is the process of legally declaring that you can’t repay your debts, offering a fresh start on the road to stronger financial health. The goal of bankruptcy is a discharge, or an order from a court that disallows eligible creditors from attempting to collect on an outstanding debt.
Many Americans find themselves facing bankruptcy due to complex factors that can include overwhelming medical bills, unemployment, exhausted credit and divorce or separation.
But it’s not a step taken lightly. Like most legal proceedings, bankruptcy is complicated, often requiring the help of specialized lawyers. And it won’t necessarily relieve you of all debt you might carry.
Bankruptcy releases you from the financial obligation for most unsecured debts, including credit card debt and medical bills. Secured debts, however — loans that require collateral, like a mortgage or car loan — are not as easily discharged. For these debts, lenders or creditors may choose to seize and sell the property securing these debts to satisfy any balance.
Speak to a financial professional to discuss your specific debts before deciding to proceed with filing for bankruptcy.
What’s the difference between Chapter 7 and Chapter 13 bankruptcy?
The two most common types of bankruptcy are referred to as Chapter 7 and Chapter 13. You might also hear them called liquidation bankruptcy and reorganization bankruptcy.
Chapter 7 bankruptcy
- Income. To qualify, your income cannot be higher than the median income for your state and household.
- Unsecured loans. Discharges credit cards, payday loans and other unsecured loans immediately.
- Secured loans. Your secured loans may be discharged, but you could lose the property attached to them. For example, if you have a mortgage, you may lose your home. Work with your lawyer to see if you qualify for exemptions.
- Case length. Your bankruptcy case is discharged in a few months.
Chapter 13 bankruptcy
- Income. Your income must be above the median income for your state and household.
- Payment plan. You’re given a payment plan outlining how you plan to repay a portion of your debts. Payment plans can span three to five years, and how much you pay depends on your income.
- Secured loans. You may be able to keep your car and home if you continue paying down your auto loans and mortgage throughout bankruptcy.
- Case length. Your bankruptcy case isn’t discharged until you’ve completed your payment plan, which could result in higher legal fees.
What isn’t covered by bankruptcy?
- Student loans. Student loans are not covered by Chapter 7 or Chapter 13 bankruptcy. You must file an adversary proceeding that shows repaying student loan debt will cause financial hardship to you and your dependents to have student debt discharged.
- Priority debts. Child support, alimony and other priority debts are not discharged in bankruptcy.
How is my credit affected after bankruptcy?
Bankruptcy can severely damage your credit history. It affects everyone’s credit score differently, but according to FICO, it can take more than 200 points off of your score.
Chapter 7 bankruptcy stays on your credit report for 10 years, and Chapter 13 stays on your report for seven years.
Getting a credit card during bankruptcy
Don’t apply for credit cards or use your existing credit cards shortly before filing bankruptcy. Your credit card issuer can say that this credit use had “dishonest intent,” and may result in your credit card debt not being discharged.
Your existing credit cards may be closed during the bankruptcy process even if they’re paid off.
Can I get a credit card after bankruptcy?
Yes, but you’ll find limited options.
It could be hard to find a credit card provider to approve you until your bankruptcy no longer shows up on your credit report. Some banks automatically reject applications or reports that disclose bankruptcy.
In the meantime, consider applying for a secured credit card. Designed to help rebuild your credit, secured cards require an upfront cash deposit that typically becomes your card’s credit limit. Otherwise, secured credit cards work in the same way that your typical credit card does.
Look for a provider that reports responsible spending and on-time payments to the three credit bureaus, which can help improve your credit score. It’s also helpful for your credit utilization ratio to keep your debt below 30% of your secured card’s credit limit regardless of having a bankruptcy on your report.
Some banks and providers offer an opportunity to convert your secured card to an unsecured card after you’ve proven you can manage credit. In this case, your deposit is returned to you, sometimes after earning interest.
After your bankruptcy falls off of your credit report, it should be easier to find approval for unsecured credit cards. If you open a credit card, whether secured or unsecured, be sure to practice good spending habits. And be careful to not spend outside your means.
The best secured credit cards
Discover it® Secured
The Discover it® Secured can help you rebuild your credit and earn rewards. Earn 1x cash back and 2x rewards at restaurant and gas stations on the first $1,000 you spend quarterly.
- No annual fee.
- $200 minimum deposit.
Secured Card® from Capital One®
The Secured Card® from Capital One® takes a different approach to secured card deposits. Capital One gives you a credit limit, but it may require only part of your credit line up front, depending on your credit. Send more toward your deposit for a higher credit limit.
- No annual fee.
- $200 minimum credit limit.
OpenSky® Secured Visa® Credit Card
The OpenSky® Secured Visa® Credit Card has no credit check. The issuer accepts most applicants and reports on-time payments to all three credit bureaus. The card offers a higher maximum credit line than most secured cards with the maximum deposit being $3,000.
- $35 annual fee.
- $200 minimum credit limit.
USAA® Secured Visa Platinum® Card
The USAA® Secured Visa Platinum® Card keeps your security deposit in a CD that earns interest while you use the card. The CD’s interest rate changes regularly; at the time of publishing the interest rate is 0.54%.
- $35 annual fee.
- $200 minimum credit limit.
Best unsecured credit cards for rebuilding credit
Right after bankruptcy, you may not be approved for an unsecured card. But after using a secured credit card for one to two years and paying on time, your credit score may be high enough to get approved for an unsecured card.
Unsecured credit cards do not require a security deposit and generally come with higher credit limits than secured cards. Make sure to keep up with payments and pay your unsecured card in-full each month so you keep building positive credit history.
After your credit score has improved with a secured card, try applying for one of these unsecured credit cards:
Discover IT Credit Card
The Discover it® Cash Back credit card has no annual fee and a solid rewards program. All purchases earn 1x rewards on everyday purchases and 5x rewards on your first $1,500 purchases on rotating quarterly purchase categories.
- No annual fee.
- 1x rewards on all purchases, 5x on quarterly bonuses
QuicksilverOne® from Capital One®
QuicksilverOne® from Capital One® earns 1.5x rewards on all purchases. The card is a MasterCard and has no foreign transaction fees, making it a good option for travelers. Just beware of the card’s $39 annual fee.- $39 annual fee
- 1.5x rewards on all purchases
Journey® Student Credit Card from Capital One®
The Journey® Student Credit Card from Capital One® is an unsecured credit card for college students. The card earns 1x rewards on all purchases when you make them, and a 25% bonus is applied when you pay your credit card bill on time.
- No annual fee.
- 1x rewards on all purchases