Getting started again with on-time payments is a sound way to rebuild your credit scores after a financial disaster.
It may sound like the stupidest financial move ever: signing up for credit cards after bankruptcy. But if you do it right, it may be one of the smartest moves you can make for your credit.
The main purpose for getting new credit cards after bankruptcy is to help boost your credit scores, which most likely took a hit when you filed. While it’s difficult (though not impossible) to earn high credit scores while the bankruptcy remains on your credit reports, it is possible to improve your scores significantly if you make on-time payments on a revolving credit account. Current, positive information is critical if you want better credit scores.
There’s a good reason to invest time and effort into improving your credit scores now, rather than wait seven to 10 years until your bankruptcy is no longer reported: Older accounts tend to help your scores more than recently opened ones. If you get several years’ worth of payments under your belt, your credit scores will likely improve quickly once the bankruptcy is removed from your reports (in seven years in the case of Chapter 13, or in 10 years in the case of a Chapter 7). But if you don’t, your credit scores may actually go down once that negative item is no longer reported.
The best credit cards to get after bankruptcy
A secured credit card is a great way to start over. This is one of the few types of credit cards that can be easy to get if you’ve been through bankruptcy or other credit problems. In most cases, a secured card is available as soon as your bankruptcy is completed (aka discharged). After you place a security deposit with the issuer, you will get a major credit card you can use just like any other credit card. To make sure you get the maximum benefit from a secured card:
- Choose a card that reports your payment history each month to all three major credit reporting agencies.
- Make your payments on time, all the time, with no exceptions. One late payment can cause your scores to drop significantly.
- Keep your balances low. Using 10% to 15% of your available credit is ideal. If you have a $250 credit line, for example, try to keep your balance at $25 to $35, or less. Try to avoid charging it up to the limit. If you do make a lot of purchases in one month, pay off your balance as soon as you can.
What doesn’t work
A prepaid card won’t help your credit scores. These cards are debit cards, not credit cards, and they typically don’t even appear on credit reports. That doesn’t mean you should avoid them altogether, though. You can use one to help you stick to a budget after bankruptcy. For example, you can load your “spending money” onto one of these cards each payday, and when that money’s gone, you know you have to put the brakes on your spending until the next paycheck.
Monitor your progress
If you are trying to rebuild credit after bankruptcy, you need to review your credit reports and scores. Assessing the damage won’t be easy, but there’s no getting around it. Get your credit reports from AnnualCreditReport.com about three months after your case is discharged. Dispute any mistakes you find. Then use Credit.com’s Free Credit Report Card to check your credit score each month. If you have positive credit references reporting to the credit bureaus, you should see steady progress over time.
One more tip: Get new credit cards after bankruptcy, not before. Don’t apply for credit until your bankruptcy is discharged unless your bankruptcy attorney gives you the OK. Taking on additional credit while you are still completing a bankruptcy could jeopardize your case.
Original Source: http://money.msn.com/credit-cards/after-bankruptcy-new-credit-cards