Banks may reject your credit card application, even for a secured card, while you’re under the strict money diet imposed by a Chapter 13 bankruptcy.
Dear Opening Credits,
My husband and I declared Chapter 13 bankruptcy. We cannot rebuild our credit because no one will give us the opportunity to do so. I have tried all the recommended secured cards and have been turned down. What do we do now? At this rate in five years when our plan is complete, we will be in the same boat we are in right now. – Sherri
No matter whom it’s from, rejection stings. To recover, you’ve got to hold your head up high, walk away and do something else. Don’t delude yourself, though. When a multitude of issuers have turned you down for even secured products, they’re sending an indisputable message: At this time, you’re simply not what they’re looking for in a cardholder.
Of course this raises the question of why credit card companies are giving you the heave-ho. Though I can’t speak for them, I can give you my professional best guess as to what their reasons most likely are.
It likely boils down to two key factors: affordability and credit rating.
Inadequate income is an issue
According to their calculations, you don’t have the means to simultaneously pay the debts that you’re currently dealing with, plus add another payment for a new line of credit. They know this based on the income you listed on the application as well as the obligations they discovered from your credit reports.
It makes sense, too. Your Chapter 13 payment was based on your household bills and your income. What is left over is routed to your creditors. The trustees overseeing such cases rarely give much extra legroom for additional expenses, and that includes a credit card balance.
Weak credit also hurts
The other factor pertains to your credit rating. If you’re like most people who have recently turned to the bankruptcy process to deal with their creditors, your FICO scores are quite poor. The damage is most egregious in the first couple of years after filing. As Chapter 13s are payment plans lasting up to five years and you have that much time remaining, you’ve just begun. That puts you in the high-risk category.
Mind that creditors also see and may judge the activity that led to the bankruptcy in the first place. All derogatory information that preceded it and that remains on your credit report is apparent. Evidence of late payments, collection accounts, monetary judgments, defaulted student loans and debts not included in the bankruptcy can scare off a lender fast.
See related:9 ways to rebuild your credit after bankruptcy
Secured card may not be an option initially
Regarding secured credit cards, typically, they are a great way for people with damaged credit to get back in business. The money you put down as collateral reduces the issuer’s risk since it can simply claim the funds on hold in case of default. However, the issuer still has standards, and for the stated reasons, you’re not meeting them at this stage.
No fear, though, Sherri. Eventually, you will be eligible for a secured card. And after that, one that requires no deposit. In the meantime, you could also look into being an authorized user on a friend or relative’s account. Be aware, though, that any credit mishap on their part could also reflect on you.
As the months pass and your debt declines, your credit rating will naturally escalate. Check your FICO scores after a year to see where they are. The higher those numbers, the more apt an issuer will be to welcome you in as a customer. Before trying again, however, be sure to communicate your desire for credit with your trustees. They have to agree to all new credit obligations, so you’ll need their permission first.
See related: How long does it take to recover from a bankruptcy?