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It can feel like it will take forever to rebuild your credit after you file for bankruptcy. The credit report notation for Chapter 7 bankruptcy sticks around for 10 years, while Chapter 13 remains for 7 years. But the good news is that the “weight” of these penalties decreases over time. What’s more, before they expire (and even right after you incur them) it’s still possible to get the financing you need.

In fact, there are loans and credit cards specifically designed to help you rebuild credit after an event like bankruptcy. If you decide that you need credit once you receive the final discharge from your bankruptcy, this guide can help you find and use new credit successfully.

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When you’re living paycheck to paycheck and just trying to make ends meet, you can come to depend on credit cards and loans to get by. But this is a high-risk behavior that can lead you into more financial hardship.

After you complete your bankruptcy filing, it’s important to ask yourself if you’ve become reliant on credit cards. Could you go one month without using credit without facing overdraft charges or driving yourself crazy?

If the answer is no, then you may need to break your credit card dependence before you consider jumping back in with new financing.

“Credit card usage is so widespread and ingrained in our culture, people look at me like I’m crazy when I suggest going cold turkey,” says Chairman of Debt.com Howard Dvorkin, CPA. “It’s as if I told them to ditch their cell phones for landlines.”

But deciding to live without credit cards isn’t as crazy as ditching your cell phone. In fact, it can be a good exercise to help you get back to a stable lifestyle. You should set a budget that allows you to cover all your daily expenses without pulling out plastic. Your budget also needs to build in savings, so you can cover unexpected expenses.

Learn how to build a budget that lets you live credit-free »

Finding the best credit cards after bankruptcy

If you decide that you need a credit card directly after bankruptcy, don’t go for traditional unsecured cards. In most cases, you will either get rejected or you will face high interest rates that increase your risk of facing a new round of financial hardship.

Instead, you should look into the best secured credit cards. These are cards specifically designed to help people with bad credit or no credit build their score. Instead of giving you a credit card based on your score, you get a card because you offer up collateral.

In this case, that collateral is a small cash deposit. This means you’ll need some cash to open the credit line. For most cards, you’ll need $200 to get started, although some cards allow you to open a line with as little as $50.

The credit limit you receive on the card is usually equal to your cash deposit. So, if you open a card with a $100 deposit, you have a $100 credit limit.

This will allow you to make small purchases and pay them off each month to build a positive credit history. This can go a long way to helping you build your score.

“You’re borrowing from yourself, but by making timely payments, you actually build back your credit,” Dvorkin says.

Is your credit rating holding you back? Find out how to fix it.

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A question from a Debt.com reader

Question: I’m in the process of declaring bankruptcy. I actually consulted Debt.com and got hooked up with a company that’s helping me.

I’m relieved, because I was so far in debt after a motorcycle accident. Actually, I was in trouble even before. I already owed $9,000 on my credit cards and was a year from paying off the bike when I ran up big medical bills and couldn’t work.

If I’ve learned anything from this awful experience, it’s to be smarter about my money. I’ve already been told my credit score is going to take a big hit, so how do I rebuild my credit? More importantly, how do I get a credit card back so I can not only rebuild my credit but also just live?

— Ivan in California

Howard Dvorkin answers…

There’s a lot to talk about here. Let’s start with this: Congratulations.

That sounds like an odd thing to say to someone declaring bankruptcy, but bankruptcy exists for a reason. It can truly help people. Of course, like any other powerful tool, it can also be used irresponsibly. I urge anyone else considering this option to read The Pros and Cons of Bankruptcy.

Based on what you’ve written, Ivan, you’re doing bankruptcy the right way, and you have the proper attitude. I’m glad you’re looking ahead, too. Chapter 7 stays on your credit report for 10 years, while Chapter 13 is slightly less at 7 years. That’s a long time.

As for credit cards, I’ve often preached you should strive to live without them, at least for a while. In my book Power Up, I wrote…

They’re not money. They don’t look like money or feel like money, and when you purchase an item with a credit card, you don’t get that nauseating feeling of spending a large amount of cash. 

That being said, I realize credit card usage is so widespread and ingrained in our culture, people look at me like I’m crazy when I suggest going cold turkey. It’s as if I told them to ditch their cell phones for landlines.

Getting credit cards after bankruptcy isn’t as difficult as you might think. Then again, what you’re getting isn’t really a credit card. You have two options: “secured card” and a “sub-prime card.” Both operate on the same principle: You put up the money you charge.

In other words, if you want a $2,000 credit limit, you deposit $2,000 with the issuer of the card. If that sounds weird, think about it this way: You’re borrowing from yourself, but by making timely payments, you actually build back your credit.

Finally, Ivan, know this: Surviving bankruptcy isn’t something to be embarrassed about, and neither are secured credit cards — especially if they’re the wake-up call that sets you on the path to financial freedom. It sounds like you’ve taken your first steps.

Taking out a loan after bankruptcy

Traditional loans will also be tough to qualify for directly after bankruptcy. It’s unlikely that you can get an unsecured personal loan at a low interest rate. Higher rates mean a higher risk of facing financial hardship again. And you want to avoid being forced to file for bankruptcy twice.

In addition, while you may be able to find financing on secured loans, such as an auto loan for people with bad credit, this usually isn’t advisable directly after you complete your filing. The interest rates will be high, which drives up the cost of your purchase and also increases your risk.

Instead, you should consider loans that are specifically designed to help you build credit. These are known as credit builder loans. These types of loans usually don’t require a credit check, meaning you won’t even ding your score with a hard inquiry.

They’re small loans that simply allow you to build a positive payment history. This will help you recover faster, so you can qualify for traditional loans.

How credit building loans work

You won’t get the money you receive from a credit building loan upfront. Instead, you receive it once you complete the installment payments on the loan. So, for example, if you take out a $1,000 loan with a 12-month term, you’ll receive $1,000 minus the interest charges once you make 12 payments.

Some credit builder loans like Self allow you to earn interest back while you repay the loan. They do this by investing the money in an interest-earning Certificate of Deposit (CD). The interest you earn goes a long way to offset the interest charges on the loan. This means you get more of that $1,000 back at the end of the term.

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Self’s secured credit card uses your CD as the deposit

If you decide to get a credit builder loan through Self, you can also get a secured credit card. Self offers an option to get a secured credit card once you have $100 or more in savings progress on your credit builder loan.

This will give you an additional account that you can use to build a positive payment history. In this case, you also get a revolving credit limit, which allows you to maintain a good credit utilization ratio. As long as you pay off any charges in full every month, you can build credit quickly.

Learn how to master your credit score with Smartcredit.

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Article last modified on September 10, 2020. Published by Debt.com, LLC

contributor

Howard Dvorkin, CPA

CPA and Chairman