When you've been struggling to pay your bills for a long time, bankruptcy may be the only option that will help you get back on a firmer financial footing. You know that you'll pay a price for taking that step with a poor credit rating, but did you also know that you'll probably lose your credit cards as well?
Once issuing banks find out that you’ve declared bankruptcy they will most likely cancel your credit cards. Even if you don’t have a balance on a particular credit card and don’t list it as one of your debts on your bankruptcy filing, the fact that you’ve filed for bankruptcy will appear on your credit report and will be picked up by one of the monitoring services used by credit card issuers. Once the banks have that information they see you as a higher risk, and one that they may not want to take, so they’ll close your accounts.
That doesn’t mean that you have to be without a credit card forever. Although it may not be easy to get a credit card after a bankruptcy, it’s not impossible.
Before you apply for a new card, however, be honest with yourself about why you had to file in the first place. For some people, the loss of a job or an illness is the main reason that they have fallen behind on their bills. But for others, uncontrolled spending—made easy because they had multiple credit cards—was the primary factor in them going so deeply into debt. So you’ll want to think carefully about why you want a credit card and how you’re going to use it. If you’re not going to be able to stick to a spending plan and use the card sparingly, resist the impulse to apply and stick to cash.
If you feel confident that you can handle a credit card responsibly, the first thing you want to do is check your credit report to ensure that all the information contained in it is accurate. For example, if you actually paid an account off before filing, you want the record to reflect that instead of reporting that the account was discharged through bankruptcy. (You’re entitled to one free credit report from the three major credit reporting agencies each year. Get details on how to apply at annual credit report. You’ll also find there instructions on how to dispute any inaccurate information on your report.)
Once your credit report is in order, you’ll have to look for credit cards that are designed for people with bad credit. These will have a higher interest rate than cards offered to people with good credit, and they may have fees associated with them as well. But don’t settle for the first offer; make sure that you shop around to find the best deals, just as you would with any type of credit card.
The prepaid debit cards aren’t a good choice if one of your primary goals is rebuilding your credit score. Prepaid cards are not true credit cards and the banks issuing them do not report your activity with them to the credit bureaus, so they don’t help rebuild your score.
Your best bet may be a secured credit card, in which you deposit a certain amount of money in an account with the issuing bank as a guarantee that you’ll pay off your card each month. You’ll handle payments as you would with any other card; the bank won’t touch the money in the account unless you fail to make regular payments, but it will report your activity with the card to the credit agencies. Demonstrating that you can handle credit responsibly over time is the best way to rebuild a credit score badly damaged by bankruptcy.