A bankruptcy can be a financial event which wrecks credit and hurts a consumers ability to qualify for loans. Its effects can be felt for years afterwards, as it appears on a credit report for 7-10 years (depending on what type of BK you file for). Fortunately, a credit score is not permanently destroyed by a default or bankruptcy. Your score has the ability to recover with a good consistent payment history, and responsible use of credit. Here are some tips that allow someone in this situation to get a credit card and/or a small loan to rebuild credit history in a short time frame.
Small Loan From a Credit Union
If a consumer has recently filed for bankruptcy, it may be difficult to qualify for a loan or new credit. In this case it is possible to take out a small loan ranging between $300 to $500 and pay it back within a short period of time, specifically for the purpose of improving credit. These loans, often called “credit builder loans” can be done through a credit union. A small, low-interest loan is taken out and placed in an interest bearing CD. It is then paid back over a period of 3 to 6 months. The monthly payment for this type of loan is very low and the payments should not be difficult for most people to manage. When the payments are completed, the borrower will collect the loan from the CD. This allows a consumer to improve credit significantly for very low cost and effort. This type of loan can also be useful if a consumer is lacking a significant credit history.
Secured Credit Cards
After a bankruptcy, many consumers will have difficulty obtaining a credit card at a reasonable interest rate. A better option in this case may be to apply for a secured credit card to build credit. “Secured cards” have a very high rate of approval (usually in the 80-90% range) because they present very little risk to a bank or credit card issuer. A security deposit is required for approval of this type of card and the card’s limit will be determined by this deposit.All cards will have a minimum and maximum deposit. Most minimums range from $200 to $500. It is important to understand factors like fees, minimum and maximum deposit amounts, and interest rates, before you apply for a card.
Secured cards should not be confused with “pre-paid” credit cards, in which money is deducted from a pre-paid account. Secured cards work in a similar fashion as unsecured cards, but they are backed with a security deposit. Secured cards typically have more and higher fees than unsecured cards. These fees may include annual fees, late payment fees, and even deposit fees. Make sure you understand how these fees work, and how they will be applied to your account before you make your deposit.
Another important point to not is that even though you do have a security deposit backing your payments, you should never miss a payment. If you do miss a payment, it will negatively affect your credit.
High Interest Rate Cards
Even after a bankruptcy or default, many consumers will still be able to qualify for high interest cards specifically targetted towards “sub-prime” borrowers. This type of card will usually have high interest rates that make up for the increased risk to the card issuer. They will often have unfavorable terms, but many users will accept them due to their inability to qualify for other types of cards. These cards can have interest rates in the range of 20% – 50%, so a balance can snowball VERY quickly. They also may have additional late fees tacked onto the balance, plus annual fees. Unsecured cards that are targeted towards people less than perfect credit have the ability to get a user into trouble with debt. Consumers that have a history of falling behind on their credit card payments, may want to avoid this type of card to lessen this risk.
- In this case, a credit builder loan or secured card, may be a better option.
The largest contributing factor to a credit score is your payment history (makes up around 35% of your score). Setting a good track record of payment after previously filing for BK, will be one of the biggest factors in turning your score around. This is true whether you are making payments on a secured card, unsecured card, or a loan. Negative credit events like late payments, will stay on a credit report for years. The more recent that these “negative events” are on your report, the more likely they will be taken into account by a lender.