With a Chapter 7 bankruptcy almost behind you, how soon is too soon to start applying for new credit? And will you be approved?
Dear Opening Credits,
I have already filed Chapter 7 and I’m nearly at my discharge date. Would it be good for me to apply for some kind credit card that could help me rebuild my credit? — Kat
Amazing how swiftly a Chapter 7 bankruptcy can kick into action, isn’t it? Once you’ve made the decision and have marched through the steps necessary, you just have to sit and wait for the formal discharge. When that happens — typically just a few months after submitting the initial paperwork — you’ll be permanently absolved of the included debts. Soon you can move forward with your financial life. What a relief.
But just how fast can you get a fresh new card, and is it wise to pursue one before or after the bankruptcy is finalized? I say wait.
Since you’ve been though the requisite bankruptcy education and counseling, you should already know that the discharge notation has been appearing on your credit report from the date that you filed. It will show up in the public records section of your reports for 10 years, and is a neon sign advertising that you did not fulfill your obligations. The accounts that you discharged will probably continue to be present in the trade line (accounts) section, too, showing the balance that you discharged as well as any late payments that preceded it.
Your credit score is also being negatively affected, particularly if it was high before the bankruptcy. Then again, if your credit score was very low, the change will be negligible.
So how will future credit issuers react when you apply for an unsecured credit card? Many will turn you down, especially if you try for premium products — those with low rates and high rewards.
When considering someone as a potential customer, creditors analyze two basic factors: credit rating and income. As your credit reports show severe damage, you’re already suspect. You didn’t pay your bills the first time, so why should they think you’ll be different now? Sure, your liabilities are eliminated (or lowered, if you didn’t include all debts in the bankruptcy), making a new loan potentially easier for you to pay. But that still may not be enough to have them see you as a responsible cardholder. A steady job with a great income helps, but they could still find you too great a risk.
Don’t get discouraged just yet, Kat. Unsecured cards may not be for you right now, but there are fantastic alternatives. Or there will be, after the discharge date passes. You’ll want your reports to show zero balances, as that will expand your borrowing ability.
Your credit will still be bad, so look for cards that are designed specifically for people in your situation. You’ll see both secured and prepaid cards, but go for a secured card, since those lenders will usually report activity to the credit bureaus and you can re-establish your reputation with excellent use. Check to be sure the one you apply for does report to the bureaus. Prepaid cards don’t do that reporting, so avoid them for the time being. You will need cash for a deposit, however, so prepare to cough up a bit of it. Some companies charge processing and other fees, and all expect you to put some money down as collateral.
In order to rebuild credit, you must use the new account perfectly. You can’t just get it, then let it collect dust. Charge a little every month, then pay the entire balance before the due date. I can’t stress enough how important this is. You won’t have many chances left if you mess up again. If you treat it right, though, you’ll achieve your goal. Every month you demonstrate that you’re a responsible borrower, your credit reports and scores will improve. Eventually, the bankruptcy notation will become less of a factor, until it’s gone from your file forever. Once you follow the above steps, you can comfortably start researching for a new credit card.