Reestablishing your credit is one of the cornerstones of thriving financially after bankruptcy. Having a good credit score means you will qualify for lower interest rates for credit cards, car loans and mortgages. This translates into significant savings. But it also makes it easier to rent an apartment or get hired. For many people exiting bankruptcy, getting a secured credit card is the first step. But is a secured credit card really worth the effort? Well, that depends on your situation and the card you’re getting. Let’s take a look at a few things you should consider:
Credit Bureau Reporting
Right after bankruptcy it may be difficult to get access to credit but how do you rebuild your credit without it. Getting new credit will allow you to demonstrate your ability to make payments on time thus increasing your creditworthiness. If you can get a secured credit card through a lender who is reporting your payments to the three credit bureaus, then it might be worth the effort. If you pay your secured credit card bill on time that positive payment behavior will begin to increase your credit score and your ability to get additional credit.
Security Deposit
All secured credit cards require you to make a deposit. The deposit can cost anywhere from $500 up to $1000 depending on the lender. That might seem a little steep for anyone just exiting bankruptcy, but whether it’s worth it or not depends on your plan. If you want to purchase a home within two or to three years of exiting bankruptcy, then getting a secured credit card may be worth it, but if you won’t be needing access to credit within a few years of bankruptcy, you may want to just put more money away into savings. One thing you don’t want to do after bankruptcy is to leave yourself with no emergency cash in the bank, so you shouldn’t spend all of your financial cushion on obtaining a credit card.
Conversion
If you maintain a good history of timely payments, your secured credit card may be converted into an unsecured credit card, and you won’t be required to fill out another application. Once your secured card becomes unsecured, expect to see yearly increases in your credit line. It’s this conversion and subsequent increases in credit that will help really improve your credit rating and FICO score.
Interest Earned
Depending on which secured credit card you get, some lenders let you earn interest on your deposit. You get to build your credit and earn a little money on the side. If you’re planning to make a large deposit, it could be beneficial to use a secured credit card that lets you earn interest on your money.
“It could be beneficial to use a secured credit card that lets you earn interest on your money”
Expensive Debt
A big problem with secured credit cards is that they can get really expensive, especially if you have a balance. Depending on the credit card, you might have an application fee and an annual fee, plus your interest rates could be quite high. If you’re planning to keep a balance, this type of credit card might be unwise and very costly.
To determine if a secured credit card is right for you after bankruptcy, try to figure out how it would fit into your long-term credit strategy.
