Rebuilding Credit Post-Bankruptcy with Credit Cards

No matter what path in life led you to file bankruptcy, rebuilding your credit once your bankruptcy proceedings have been discharged is no small feat. Your new image as a borrower is one of a person who is reckless – and who does not mind walking away from responsibility by abandoning their just debts. The good news is that you can rebuild your post-bankruptcy credit by opening up two to three credit card accounts.

Credit Cards for Horrible Credit

Once your bankruptcy is discharged, your slate is marred, not “wiped clean” as the old saying mistakenly goes.  Rebuilding your credit takes carefully planned and precisely instituted steps.  You will not qualify for a traditional credit card right away after bankruptcy, but you will qualify for prepaid cards and contrary to popular belief, there is a great benefit in having a prepaid account when rebuilding credit.

How it Works

A prepaid credit card works like the traditional cards that might have put you on shaky ground prior to your bankruptcy – with a big catch.  The spending limit that is set for your prepaid card is determined by a deposit that you make with the bank that issues your credit card.  For example, if you deposit $400 with the issuing bank, your credit limit or spending limit will be $400 – although some offers may match your deposit by extending an equal amount of credit – in which case the spending limit will be $800.  You will make payments on the purchases that you make each month just like you would with a traditional credit card (and be subject to the same penalties if you don’t repay responsibly, even though it is your own money that you are spending and thus, repaying).

Adding Points to Your FICO Score

Each time that you make a payment on your prepaid credit card balance, you will be rewarded with points added to your FICO score (although some cards report quarterly or four times each year).  You can also be penalized for paying late by having a new negative indication placed on your credit report, or receive a penalty if you exceed your available spending limit.  To add the most points possible when rebuilding your credit after bankruptcy, be sure to:

  • Make your payment before it is due each month. Allow ample time for your payment to arrive via U.S. Mail, or sign up for online bill pay.

Run a balance that is equal to one-third of your available credit line, paying off the entire balance above this amount each month. Credit card issuers want to see that you can manage credit, which is why it is important to show that you are using credit by running a balance and by not using an excess amount of your available credit. Never charge more than 50 percent of your available spending limit.  So, in a nutshell, if your available credit line is $800, never charge more than $400 each month, and always pay off everything over $275 or so.

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