Rebuilding your credit after bankruptcy is an important step. After all, if you don’t begin using credit responsibly after your discharge, you will find it hard to secure credit in the future. Whether you hope to buy a home within the next decade or just want to qualify for the best rates on your auto insurance, working up to a good credit score can go a long way.
Unfortunately, many people fall into the trap of making the same mistakes after bankruptcy that they made before filing. Whether you file for Chapter 7 or Chapter 13 bankruptcy, you need to make smart decisions about how you use credit after your bankruptcy. That statement is especially true when it comes to credit cards after bankruptcy.
Some credit card companies have predatory practices
Rebuilding your credit often involves obtaining a credit card. Many people choose to use secured credit cards, which have the holder place a deposit with the company issuing the card. Other people will go for standard, unsecured cards that may charge an annual fee or a higher interest rate.
Regardless of which you choose, it is always in your best interests to carefully review the terms of the card you might apply for. Shortly after your discharge, you will likely receive a massive influx of credit card offers. Credit card companies and banks know that there are limitations on how frequently you can file bankruptcy.
In other words, helping you get deep into debt immediately after a bankruptcy is a great way for a credit card company to make a lot of money off of your account. You need to know that the interest rates, fees and annual costs associated with the card are reasonable and fair. More importantly, you must commit yourself to making wise choices about how you use that credit card.
Your goal should be to pay off your balance each month
Many credit cards, even those offered to someone with a massive issue on their credit report, such as bankruptcy, offer incentivized interest rates at first. It is tempting to make purchases on credit when you have a low interest rate. However, you need to look at the fine print carefully.
In most cases, these introductory interest rates only apply for as long as you make payments on time. If you miss a payment or send it in late, the interest rate will increase to the penalty rate, which is likely quite high. If you fail to pay off the full balance of the card before the interest rate expires, you may have to pay interest at that higher rate for the whole time the balance remains on your account, even retroactively to the date of purchase, in some cases.
The best way to rebuild your credit after bankruptcy using credit cards is to use them sparingly. Only charge amounts that you know you can pay in full by the end of the month. Doing that helps build a strong payment record. It also ensures that your utilized credit percentage remains low. Both of these factors will boost your credit score over time.