Struggling with debt is more common than some may think. New York Federal Reserve data reported that U.S. households have more than $14.3 trillion in debt during the first quarter of 2020, which is a 1.1% increase from last quarter.
As a result of overwhelming debt, more than 760,000 people filed for bankruptcy in the United States during a 12-month period. Needless to say, bankruptcy can have negative effects on your credit score.
Should you get a credit card after bankruptcy?
After suffering the negative effects of a bankruptcy on your credit score, you may need a way to boost your credit and get you back on track. Some say credit cards are a good way to increase your credit, while helping you get back on your feet. However, the idea may seem counter-intuitive, as credit cards may have led you to bankruptcy in the first place.
With careful planning and use, you can ensure that your credit card balance does not get out of control. Signing up for a credit card and using it and paying off your balance monthly can actually boost your credit.
Our first recommendation is that you go to your own bank or credit union and request a secured credit card. How this works is that you put money in a savings account at that institution. The financial institution uses that money to secure the credit line of that card. For instance, you put $1100 in a savings account and they give you a $1000 limit card. Then you use only up to 30% of the available balance each month ($300 in this case) and pay it off every month. This will build your credit without huge fees and costs.
What are subprime cards?
The other option, since your credit score may be pretty low, would be to get a card from subprime lender. These lenders target those who have credit below 600. Although they offer credit lines, the money comes at a higher cost. In addition to having high interest rates, subprime lenders may tack on extra fees, such as yearly fees, processing expenses, maintenance and authorized user fees. The interest rate may not matter if you pay off your card in full every month, but the additional fees can add up. Be careful if you choose to use a subprime lender for your new credit card.
In order to bypass the additional expenses, look for mass-market issuer cards. These companies offer credit to those with low scores, but have clients put down a deposit. This offsets any liabilities the card experiences when it lends to those with poor credit.
