Secured Debt After Bankruptcy: How To Find It And How To Handle It

Holding a Credit Card

One of the easier ways to start rebuilding your credit after a bankruptcy is to look for secured debt, mainly in the form of secured credit cards. These debts offer you a way to give your credit reports a record of current activity while giving lenders a low-risk customer.

Right after your bankruptcy filing and approval, your credit situation likely won’t change. You’ve got to give yourself a few months, at least, to let the dust settle and to get some time in between you and the filing.

You can, however, start talking to your bank about their requirements for getting a secured credit card with a low limit. When the time is right, apply for that secured card and start creating a better credit record that puts positive information on your post-bankruptcy credit reports.

A Look at Secured Credit Cards

When you get a secured credit card, you put down a deposit that is usually the same amount as your credit line. In other words, if you want a credit line of $500, you’d put down a deposit of $500. Occasionally you’ll come across a bank that wants a slightly higher deposit, such as 120 percent of your credit line.

Once you’re approved and have handed over your deposit, you wait to receive your card like you would any other card. Once you have it, you use it like a regular credit card.

Secured cards are made for people who are rebuilding credit, so approval is often much easier than with other cards. However, you can still be denied if the bank deems you too risky. This can happen if you’re still in the middle of your bankruptcy, or if your post-bankruptcy financial situation has remained dire.

Lenders want to see that you have the income necessary to pay your monthly credit card bill. The deposit does not act as a second account from which the lender can deduct a regular payment. It’s there only to cover your card amount if you have to close the card.

A Life With Low Credit Limits

The big issue with secured cards is that because the limit is usually lower, your credit utilization is affected more. Utilization forms about 30 percent of your score criteria, so you have to be extra careful to not let your credit usage get too high.

One tactic you may want to use is making more than one payment per month. Instead of placing $400 on a $500-limit card and paying it off at bill time, pay off the card whenever you’ve added another charge, even if that means you’re making a few payments per month. That prevents your balance from becoming too high during your bill cycle.

Another tactic is to purposefully avoid using the card for much more than a small purchase each month. For example, choose a day, such as the first of each month, and bring the card to a grocery store to buy $10 or $20 worth of groceries. Pay off the card in the days following the purchase, and stick the card in a filing cabinet for the rest of the month.

A Warning About Autopay

You will hear advice to put your credit card payments on an autopay schedule. This works for some people, mainly those who have a consistent income each month that leaves them with cash in the right account all the time.

If you tend to have income arriving in several forms, such as some through direct deposit, some through an online service like PayPal, and so on, you may find yourself making payments from different accounts. In that case, autopay could be a disadvantage as it would require you to move money between accounts, which could result in extra fees for you.

With proper management, secured debts can help raise your credit score at a good clip. There is never any guarantee of how fast you can rebuild credit and raise your score. However, doing everything right is a big help. If you want more advice about rebuilding credit after a bankruptcy, contact Frances H. Hollinger, Attorney at Law.