The temptation to apply for a new line of credit directly after bankruptcy can be very tempting. The question, however, is whether or not it is the best idea. There are some things that you should consider before you fill out that credit card application.
In recent years, the bankruptcy rate went up exponentially. This was a direct response to an economy that had gone bad and left many consumers without any other choice than to have their debt slates wiped clean. However, once the slate is wiped clean, the question is when a person can apply for new credit cards so they can start again.
After a person has filed for Chapter 7 or Chapter 13 bankruptcy and gone through the steps, all a person has to do is wait for formal discharge before they can apply for credit cards. Chapter 7 bankruptcy is typically discharged in an average of six months. This form of bankruptcy is known as "liquidation bankruptcy" because it involves the liquidation of assets to pay off creditors, if there are any assets. If there aren't any non-exempt assets, then the bankruptcy can be discharged anyway. In the case of Chapter 13, the bankruptcy is discharged after the court-approved payment plan is completed. This can take anywhere from 3 to 5 years.
Once you are absolved from the debt, you can move forward with your financial life. But the question is when you can get that brand new credit card, is it wise to go ahead and pursue it?
Applying For New Credit
Some individuals have pursued new cards before their bankruptcies have even been finalized. This has resulted in the acquisition of high interest credit cards that can take quite some time to pay off if the balance is not paid off each month. The truth, however, is that waiting could actually play in your favor. In fact, many financial advisors will tell individuals to not apply for new credit before bankruptcy is finalized and to even wait after it is finalized.
You have been through the required bankruptcy education and you went through a course with a credit counselor, so you should know that the discharge will appear on your credit report from the time you filed. For 10 years, the fact you filed bankruptcy will show up in your public record reports. Basically, it is a flashing sign that says you did not fulfill your financial obligations. When looking at your credit report, the accounts that were discharged will most likely show up in the trade line section of your credit report, showing what the balance was that was discharged, as well as the late payments that preceded the discharge.
Your credit score is also going to be affected in a negative way, particularly if it was high before you filed bankruptcy. If your credit score was very low prior to bankruptcy, then the change is going to be very subtle.
So how will future prospective creditors react when you apply for one of their unsecured credit cards? Many will turn you down, especially if you try to acquire a premium product. A premium product is considered those that have high rewards and low rates.
How Creditors View You
When creditors consider someone as a potential account holder, they look at two factors: income and credit rating. After bankruptcy, your credit report shows serious damage. This means that you are automatically a suspect. They question why they should extend you credit now if you didn't pay your bills the first time around. Sure, the liabilities are lowered or eliminated, making a new line of credit easier to pay. However, that still may not be enough for them to view you as a responsible cardholder. It is also true that having a great income can play in your favor, but they could still find you rather risky.
But don't get discouraged. Unsecured credit cards may not be the answer at the moment. The good news is that there are alternatives after the discharge date. In the meantime, you can work on your credit report showing zero balances on everything so that your borrowing ability increases. Yes, your credit will still be bad. That is why it is good to look for cards that are designed for individuals who are in your situation.
When looking at these card products, you will notice that there are prepaid cards and secured cards. It is ideal to go for the secured card because these lenders will report the activity to credit bureaus, allowing you to re-establish an excellent credit reputation. Make sure that the one you apply for does report to the credit bureaus. Prepaid cards do not report, so avoid them unless you really need one. When you get a secured card, you will need cash to make a deposit, so be prepared to cough up a few hundred dollars. Some companies also charge processing and other fees and will expect money down as collateral.
Once you have the account, you will need to use it perfectly to rebuild your credit. You can't just get it and then let it sit in your wallet or on a shelf somewhere. You will need to use it and then pay off the entire balance before the due date. This is something that is very important. Not only will using it perfectly help your credit, but it will help you develop good credit habits. Over time, your credit score will improve and the bankruptcy notation will not carry as much weight as it did in the beginning. It is a process, but it is a worthwhile one.
All it takes is a little patience before applying for a new credit card. If you are patient, apply for the right one, and treat the account the way that it needs to be treated, you will find that your credit will become something that you can be proud of.