3 reasons you can't get credit after bankruptcy

Opening Credits columnist Eric Sandberg
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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Question for the CreditCards.com expert 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

Answer for the CreditCards.com expert Dear 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 their solutions.

1. You're 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.

2. You 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.

3. Your 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 credit card.

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 get it.

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

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Updated: 10-16-2018