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Retired, with recent bankruptcy: Should you get a card?

Proceed with caution and consider a secured card

By  |  Published: December 31, 2016

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Question

Dear Credit Smart,
I am recently retired as of January 2015, and my Chapter 7 bankruptcy was discharged about one month ago. I live on my income from Social Security (about $2,000 a month) and a pension (about $1,400 monthly).  My only expenses now are rent ($975), utilities, life and car insurance, cellphone and cable. My credit score is 705. When would it be a good idea to apply for a credit card? I don’t mind living on cash in hand, but a credit card would be a nice safety net and a way to increase my score. Please advise. Thanks. – Antoinette

Answer

Dear Antoinette,
A common problem people have after retiring is deciding if they should open new credit accounts. While having a credit card can be a great convenience, for those on fixed incomes, that convenience sometimes can be costly.

You have the added concern of your recent bankruptcy, which can make obtaining new credit a little trickier. Though discharged, your bankruptcy will remain on your credit report for up to 10 years from the filing date. I am not saying that your bankruptcy will disqualify you from getting a credit card, but you might not be able to get a card with the best interest rates now.  

Your credit score, though, is above the 700 mark, which is generally considered good. With your good credit score, your bankruptcy may not be an issue with many creditors.

There are many moving parts when it comes to your credit score, and issuers don’t use credit scores alone to determine whether to send a credit card to you. Your overall financial well-being also is assessed, including your ability to repay.

If you do find lenders are rejecting you for a credit card, consider a secured card, which requires a security deposit. Secured cards can help you build credit post-bankruptcy. Use the card regularly, pay on time and never carry a balance. In a year or so, you can try again for an unsecured credit card – or graduate from your issuer’s secured card to one that’s unsecured.

You are correct in your thinking that having a credit card could increase your score since it will add available credit to your profile.  However, a hard credit inquiry triggered by your credit card application will show up on your report and that will temporarily lower your score by a handful of points. 

So proceed cautiously. Apply for only one card, and wait for a response before applying for another. A tool such as CreditCards.com’s CardMatch can help you narrow the field to cards for which you are likely to be approved.

Assuming you move forward with obtaining a card, there are steps you can take to protect and increase your credit score. The No. 1 factor in your credit score is your history of on-time payments.  Your credit utilization (available credit) also will be very important. You say you want the card as a safety net, but to get the most out of your card for your score you will need to use the card on a fairly regular basis.

What you can do is use your card for your regular monthly expenses, such as groceries and gas. The goal is to keep from charging more than about 35 percent of your available credit, and to pay off the balance every month.  This demonstrates a responsible use of credit, keeps your card active and builds up the on-time payments portion (35 percent) of your score.

The best thing about this plan is that you will never find yourself mired with credit card debt, because you will never charge more than you can afford to pay back.

Of course, your reason for wanting a card for a safety net means that you may have to use the card for an unexpected expense that you are not able to pay for all at once. In that case, you will need a plan for paying off that expense in the shortest time possible.  If you can pay off the balance in 90 days, you will pay a minimal amount in interest.

Remember to always use your credit smarts!

See related: 5 reasons you need good credit in retirement, 9 things to know about secured cards

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Updated: 08-20-2017

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