Getting a Secured Credit Card After Bankruptcy

The majority of people who have filed for Chapter 7 or Chapter 13 bankruptcy will have difficulty getting a regular credit card soon after the bankruptcy. For many, not having a credit card can be a blessing in disguise. But others will need a credit card for travel or online shopping. And still others will be ready to start building positive credit history right away – and the way to do this is get credit and use it responsibly.

One way to solve the credit card dilemma is to get a secured credit card. Most people can get a secured credit card soon after bankruptcy. After several months, or a few years of responsible use of the secured card, people can get a regular credit card.

(To learn about other ways to get a credit credit right after bankruptcy, see How to Get a Credit Card After Bankruptcy.)

What is a Secured Credit Card?

Here’s how a secured card works:

• You deposit money into a savings account and the bank or credit union gives you a credit card. Your credit limit is a percentage of the amount you deposited. 
• When you make purchases, the amount will be deducted from your savings, which you must then pay back as you would a monthly credit card bill. You pay interest, which is often very high.

Downsides to Secured Cards

If you do opt to get a secured card, there are several important things you should know:

• Secured cards usually charge relatively high fees.
• Interest rates are also very high if you don't pay your balance in full.
• There may be high charges if you try to go over the limit, or the card may be declined

Shopping for a Secured Card

When shopping for a secured card, look for one that:

• doesn’t have an application fee
• charges a reasonable annual fee, and
• converts to an unsecured card after about 18 months of on-time payments. 

In addition, make sure that the card issuer reports to the three major credit bureaus — Equifax, Experian and TransUnion. If it doesn’t, your responsible use of the card won’t improve your credit rating.

Using a Secured Card

One you have the card, don’t spend the maximum amount on your credit limit.  A good rule of thumb is to charge no more than 30% of your limit so that you can comfortably pay the balance in full each month.  

Because the interest rate is likely to be high, avoid carrying a balance. It’s best to use the card to make a few small purchases each month, and then pay off the balance to build good payment history.

This goes without saying: Make your payments on time. 

Use the Secured Card as a Stepping Stone to Getting a Regular Credit Card

Having a secured card allows you to begin establishing a history of on-time payments and demonstrates your ability to use the card responsibly. This will boost your credit score so that one day you will qualify for a regular credit card.

Some secured cards will convert to a regular credit card after you have used it responsibly for a certain period of time; for example, 18 months. This is an excellent way to move towards getting a traditional credit card.