3 reasons you can't get credit after bankruptcy
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I just recently
emerged from bankruptcy and want to jumpstart my credit. I have read COUNTLESS
articles online and thought I had a decent plan: Apply for a secured card, open
a CD and borrow against it, piggyback on my partner's card. Well, I am running
into roadblock after roadblock. I applied for a secured card with Bank of
America, after talking with the personal banker and being assured that I would
get approved, I was denied, which I was afraid of because I didn't want to have
an inquiry on my credit report and not have an account to show for it. The "no
inquiries in 12 months" was the only positive thing adding to my score!
I have searched for
banks that offer low CDs that have the ability to borrow against and report the
borrowing to the bureaus, but they all require a credit check. So, I have not
bothered setting one up, knowing that I was declined for the secured card I will
definitely be declined with the bank. I have read many things online about
piggybacking on my partner's card. I have not done it yet out of fear of
damaging his credit and not having it positively affect mine, but I feel like
this may be my only option at this point. I would apply with other secured card
companies, but I am afraid of having multiple inquiries on my report and not
getting approved for any of them. Please help! What can I do to start the
rebuilding process? -- Jason
It is true that secured cards
are usually easier to qualify for than their unsecured cousins. The bank takes so
little risk in offering them because it can take the cash deposit you set up
with the card if you don't pay as agreed. If the account wasn't secured, the bank would
have to sue you for the delinquent balance. Even if it won, you might not have
any income to garnish or property to take, so it would lose money.
I'm not sure exactly why you've been
denied for a secured account, but here are three possible reasons, along with
barking up the wrong bank. Each financial
institution has its own lending criteria and some dislike bankruptcies more
than others. To understand why, I always encourage credit seekers to think like
a lender. What qualities would you want in a borrower? Probably you would want someone who has
a long and strong history of repaying their debts. Let's say an
acquaintance asks you for a loan, but you find out that he reneged on previous
arrangements several times in the recent past. Even if he gave you something
valuable to hang onto as security during the repayment term, you still may
have qualms and turn him down.
Solution: Approach a different bank
that has more forgiving standards. Check out the current deals available for bad credit. Before
completing the paperwork, though, call the bank to ask what its policies are
regarding bankruptcies. Apply to the one
that says it will give you the green light.
still owe too much money. Chapter 7 bankruptcies allow indebted
people the opportunity for a fresh start by allowing them to discharge
unsecured debts. But not every filer has only those types of balances. You could
still be saddled with other big obligations, including thousands of dollars of
mortgage arrearage, back child support and student loans. If so, the bank may
feel that you're still overextended and can't afford to borrow any more.
Solution: Pay down remaining debts.
You'd want to do that anyway, right? Assuming you're employed, set a fixed
amount of your salary aside for monthly payments. Be aggressive. As those
balances decline, your credit rating will rise. When your scores are
considerably higher, try for an appropriate secured credit card again.
income is insufficient. Returning to the idea of you being a
lender, imagine the borrower did discharge all of his debts and owes not a
penny. Is that all that you'd want to know about this guy? Probably not. I bet
you'd be interested in his income, too. If he's not earning anything (or only
a little), you'd question his ability to repay and may deny him credit.
Solution: Earn more money, especially if you're
just working part-time or at a very low-paying job. Lenders want to be sure you
have the means to make good on what you borrow. When you've augmented your
income, you'll have a much better chance of being approved for any type of
Two more things: Inquiries have very
little effect on a credit rating in comparison to such factors as payment
history and the amount of money you owe in relation to the amount you can
borrow. However, if that's all that's being reported, they can assume greater
impact. Apply to one card at a time, and only when you are certain you'll
And as for piggybacking on someone
else's credit as a co-signer or authorized user, I say no. If either of you
don't use the card correctly, both of your credit reports will reflect the
damage. Instead, transform yourself into an appealing credit customer.
See related: How being an authorized user can hurt your credit score, 5 ways to rebuild credit after bankruptcy
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: October 17, 2012