Looking for credit after Chapter 7 bankruptcy
Dear Credit Wise,
I have an income of over $90,000 per year. I filed a Chapter 7 bankruptcy in August of 2013 and received a discharge in December of 2013. I currently have no credit cards. What kind of credit cards would I be likely to get? I don't want to apply and get turned down because I don't want to lower my credit score. -- John
Bouncing back from a bankruptcy is never easy, but it seems you may be in a good place to get started. As you probably know, a Chapter 7 bankruptcy will stay on your credit report for 10 years from the date of filing. However, this does not necessarily mean that you won't be able to obtain credit now. Since it has been more than a year since your filing, you may have even started receiving some offers. About half of Chapter 7 filers have new credit lines within a year of filing.
You're right to be wary of new credit, though. If you'll read the offers carefully, they usually stipulate you may not qualify for the card once the application is made. So yes, if you apply and are turned down, your credit score would take a modest hit.
But there are ways to build your credit back up.
Start by seeing where you stand on the credit ladder. Pull your credit reports from AnnualCreditReport.com for free. See if they accurately reflect your credit past, and if you find errors, take the necessary steps to fix credit report mistakes. Then obtain your credit scores (you can purchase them for about $20 each from myFICO.com). You will see how well your credit has recovered.
If your score has climbed back into the mid- to high-600s, congratulations. Your credit has made it out of the red zone, where every card issuer will turn you down, and into that middle territory where you may or may not get a card. With that kind of score, you would qualify for cards aimed at people with average credit. If, on top of that, your bankruptcy was due to a one-time financial downturn and you have no trouble handling credit, then comparison-shop carefully and go for it.
However, if your credit is still in the doldrums and your bankruptcy was due to problems handling credit, I would suggest you open a secured card. This kind of card bears the name "secured" because you put down a deposit before you can use the card and you are essentially borrowing from yourself. These cards can be very helpful in building a credit file if used correctly. I would suggest you set your card up with funds that you can afford to not have access to for a while. To build your score, you must show that you can manage your accounts over a period of time. You will need to stay under your credit limit and make on-time minimum payments each month.
Some secured cards may offer additional credit without an additional deposit once you have an established payment history. This would be ideal since you wouldn't have to worry about being turned down and would then have some credit at your disposal. After that, you should be able to get at least low credit balance cards. The key here is to move slowly.
Since you are in the somewhat envious position of having no unsecured debt, you should focus on living below -- not just within -- your means. Establish a realistic budget for yourself that includes a plan for saving. If you can do that, you will be able to build an emergency savings account. Having emergency savings is the first line of defense against financial problems. Life will happen and sometimes life is expensive. Consumers without adequate emergency savings must resort to borrowing and very often the cost of borrowing is not cheap.
Common financial wisdom says you should have three to six months' living expenses (or more) in your emergency savings account. This amount can be overwhelming so my advice is to start small. Save what you know you afford to put away on a regular basis and then leave it alone. Open a separate savings account that is not directly tied to your regular accounts to make it a little bit harder to access. This will give you time to decide if you are really experiencing an emergency or if it can wait.
Strive to stay within your budget and pay all your bills, not just your credit card bills, on time, every time. This will go a long way toward re-establishing your creditworthiness and allow you to be picky about which creditors you want to deal with in the future.
Be wise with your credit!
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