Rebuilding Credit After a
Personal Bankruptcy
If your credit
wasn’t shot when you filed for bankruptcy and you took my advice about paying off
several credit cards before filing, you’ve probably managed to save one or two cards.
There are some other ways to get credit cards that you should be aware of.
First there is the bank "debit" card. Many banks offer debit cards that look and work just like a genuine Visa or MasterCard with one critical exception. They are not credit cards but are instead debit cards. When you purchase something with one of these special credit cards, instead of sending you a bill, the bank just subtracts the purchase amount directly from your checking account.
If
there aren’t enough funds in your account to cover the purchase, the transaction is
refused. Using one of these cards is exactly like writing a check except that they’re
much more acceptable (they can be verified online unlike a check) and the bank gets their
cut through the merchant fees they charge.
Debit cards are quite easy to get. Some banks don’t bother with a routine credit
check, as they don’t see much risk here. What have they got to lose? You may have to
call several banks but you should be able to find one that will give you their debit card
without much fuss. As easy as these cards are to get, they do have several limitations.
Some of the car rental companies no longer accept debit cards, so renting a car with a
debit card may be a problem.
The most important thing about debit cards is that they don’t report your credit
transactions to the three biggest credit reporting agencies so debit cards are of no value
whatever when it comes to rebuilding your damaged credit rating.
Another approach is to go after a ‘secured’ credit card. Again, these cards look
and work just like real Visa or MasterCards but have a catch. In order to get one, you
must deposit a required minimum sum in a savings account with the issuing bank. They
usually pay a nominal interest rate of around 2% on your funds while they have them.
Unlike the debit cards, your transactions WILL be posted to the credit reporting agencies
so these cards are an ideal way to rebuild your battered credit.
There are a few rules though. First, you must use the credit card on a regular basis. Just
walking around with the card in your pocket won’t do you any good. The best idea is
to run up your outstanding balance to around 80% of the credit limit. This way you’ll
pay a lot of interest, which the bank will love you for (the interest rates on these
secured cards are very high usually around 17-27% or even more). Secondly, always make
your payments on time. And lastly, never - ever exceed your credit limit. (Always call
customer service and check your balance before you make a larger purchase just to be
completely sure you're not in danger of charging over the credit card's credit limit)
If you use the card regularly and don’t break any of these rules, at the end of the year you should start to receive offers for the traditional unsecured bankcards. You can then apply for one or more and then return your secured card and request that they close your savings account and return your deposit funds (plus your interest).
Or
you may actually receive an offer of an unsecured credit card from the same bank that
issued you the secured card. That’s what happened to me. It was great. One year later
I made one call that cancelled my secured card, closed my deposit savings account and
provided me with a brand new unsecured card all at the same time.
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