Can I Apply for a Secured Credit Card Before Bankruptcy?
Though almost anyone can acquire a secured credit card, these types of cards are most useful if you are re-establishing your credit -- particularly following a bankruptcy. A bankruptcy has a detrimental impact on your credit score and can remain on your credit report for up to 10 years. You can apply for and use a secured credit card both prior to and after a bankruptcy, as the secured debt is not eligible for discharge in bankruptcy court.
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Secured Credit Cards
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A secured credit card works similarly to a traditional unsecured card in that you make purchases up to your credit assigned credit limit and make regular monthly payments to repay the debt. However, unlike traditional credit cards, secured cards require cash collateral -- usually between $300 and $500 -- to open an account. Credit card companies typically offer these types of credit cards to applicants with a poor credit history who cannot acquire credit from alternative sources.
Bankruptcy Rules
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You cannot discharge a secured debt in bankruptcy. Because the cash you use to secure your credit line acts as collateral, debt on a secured credit card is not eligible for discharge in bankruptcy. Additionally, if you intentionally charge a debt to a credit card or other line of credit knowing that you intend to file bankruptcy, the U.S. court system will deem it a fraudulent purchase and disqualify the unsecured debt from bankruptcy discharge.
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Expert Opinion
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According to Liz Pulliam Weston, personal finance columnist for MSN Money and the author of "Your Credit Score, Your Money & What's at Stake," you must use credit to rebuild your credit. She suggests you obtain a secured credit card after bankruptcy, rather than beforehand. If you make timely payments on your secured credit card, you can slowly begin to rebuild your credit. To optimize your credit score, do not carry a balance of more than 30 percent of your credit line at any given time. Unless you know that you cannot manage credit cards, avoid living a cash-only lifestyle in the years following your bankruptcy.
Considerations
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Be careful to compare your options before applying for a secured credit card after bankruptcy. Because creditors know that your credit is adversely affected by bankruptcy, some lenders may overcharge you in annual fees and interest to rebuild your credit with a secured card. Do not apply for more than one or two credit cards either, as doing so could further damage your credit score. Lenders look unfavorably on multiple credit applications, and each application will remain on your credit report for 24 months.
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References
- Photo Credit credit card and hand image by Warren Millar from Fotolia.com
