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When to apply for a credit card after bankruptcy

After a bankruptcy filing, the task of repairing your credit begins. But how soon can you apply for new credit? It depends on the type of bankruptcy you filed, as your bankruptcy must first be discharged. It can take as little as six months or as long as five years.

Types of bankruptcy

There are two types of bankruptcy for most consumers: Chapter 7 and Chapter 13.

  • Chapter 7 will eliminate nearly all debt (with some exceptions including student loans, child support, and IRS debt) with no repayment required.
  • Chapter 13, sometimes referred to as an “employee” plan, is a debt reorganization. This type requires some repayment over time based on your disposable income (under strict IRS guidelines) and the amount of debt you have.

Most debt-crushing consumers would prefer a Chapter 7 bankruptcy to get a fresh start by liquidating all debts. However, to qualify for a Chapter 7, you must pass a means test that assesses your income to determine if it is above the median for your state and what your disposable income is.

Chapter 7 is the most effective and damaging form of personal bankruptcy. It stays on your credit report for 10 years. However, once Chapter 7 has been filed, it is usually discharged (completed) in four to six months. So while Chapter 7 has the longest period of damage to your credit report, it has the shortest time to start repairing your credit.

If you don’t qualify for Chapter 7, you may have to file for bankruptcy under Chapter 13. This chapter requires repayment of a portion of your debt over three to five years. Chapter 13 will remain on your credit report for seven years from the date of filing and is not released until your debt is repaid. Obtaining credit or conventional loans during this period is highly unlikely.

Applying for a credit card after bankruptcy

As noted, your bankruptcy must be discharged in federal bankruptcy court before you can apply for new credit; the bankruptcy notation does not have to be removed from your credit report, it just needs to be discharged. Your credit score will suffer serious damage from bankruptcy, no matter which chapter is filed.

To improve your credit score, you must start by repairing your credit report. The process is similar to starting to use credit for the first time. However, in addition to adding positive behaviors to your credit report, you also have to deal with the negatives that already exist.

Before you start applying for new credit, have a game plan for handling any new debt you take on. Don’t get trapped into letting uncontrollable debt overwhelm you again. The credit counseling required for filing and release can help you develop a credit management plan that’s right for you.

Check your credit score

Before applying for new credit, you should check your credit score to know exactly where you stand. You can access your score through your bank or other financial institution, but there are many free ways to check your credit score. Plus, anyone can get their credit report for free at annualcreditreport.com. Although this site does not offer free scores, it is a valuable tool for checking the accuracy of your credit report, as this information defines your score.

Be vigilant and skeptical of any unsolicited offers of credit that are supposed to help you recover. Filings for bankruptcy can be a mailing list for expensive products or scams.

Evaluate your options

Knowing your score will help you target when the credit card comes in and find a card you can qualify for. This is important to remember because bankruptcy will likely prevent you from qualifying for top tier cards, and each application will result in a credit inquiry, further reducing your damaged score.

So, aim for the best card you can get within the score range you’re in. Bankrate’s CardMatch tool is a good place to start. A secured card may be your best bet. Obtaining a top card will come with time, but for now, small steps are essential.

There are also cards with no credit condition. Many of these cards are designed for students and other credit beginners. All credit cards should have a Schumer box outlining their terms. Look carefully and avoid anything that is misleading or confusing.

Rebuilding your credit with a credit card

Once you have a credit card or a loan, the number one key to rebuilding your credit starts with paying all your bills, not just your credit card bills, on time, every time. Resist the temptation to ask for a line of credit increase once you have a card until you see your score turn around. Otherwise, the answer will most likely be no and you will damage your score with a difficult survey.

Keep your credit card balances low. Ideally, you should keep them as close to zero as possible. Keep in mind that this first card will not come with a great rate and may even be backed by your own money. So, keeping your balances low will go a long way toward building the credit utilization portion of your credit score (second only to one-time payments in importance). Plus, it will save you money in interest if you don’t have a balance.

Finally, if you are a tenant, make sure your landlord declares your rent payments. Otherwise, you could turn to a rent declaration service. Your rent can be your biggest monthly obligation, and reporting those payments on time can help. You can also check out the Experian Boost program which will report utilities and other monthly obligations.

The bottom line

Your bankruptcy must be fully discharged before you can apply for a new credit card. If you file for Chapter 7 bankruptcy, your debt will likely be paid off in four to six months. If you file for Chapter 13 bankruptcy, it will be three to five years.

Applying for new credit is essential to rebuilding your score, but it’s important to have a plan for using your credit responsibly. With your new card, make sure you’re practicing healthy habits like paying on time each month and keeping your balances low.