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Credit Cards After Bankruptcy: What You Need to Know

Credit Cards After Bankruptcy: What You Need to Know

Filing a bankruptcy or consumer proposal eliminated your debt and gave you a fresh start. However, almost everyone who files wants to get a new credit card after bankruptcy. I understand. There are times you will need a credit card, for example, to make online purchases. However, we want you to wade back into debt wisely. This guide helps you decide when to get a credit card after bankruptcy. And if you do, which credit card issuer is best.

Should I get a credit card after bankruptcy?

After filing a bankruptcy or consumer proposal, most people believe they need a credit card. Getting a new credit card can be beneficial:

  • Building credit after bankruptcy requires obtaining new credit and re-establishing a good payment history. A credit card is the best type of credit to begin your credit rebuilding.
  • You may need a credit card for online payments, to rent a car or book a hotel room, instances where you can’t use debit cards or transfer money from your bank account.
  • A credit card might make keeping track of your spending easier than using cash.
  • And of course, there are the standard credit card benefits like purchase protection and earning rewards or points.

Credit cards are often considered a need, especially for those who are credit building. The problem, however, is that they pose a risk that you will end up with more credit card debt after bankruptcy.

Beware the disadvantages of credit cards

As a Licensed Insolvency Trustee, my number one concern with anyone getting a credit card after their bankruptcy or proposal is that they will rack up new debt. However, this doesn’t have to happen as long as you are aware of the risks.

Credit card spending can get out of hand quickly if you use your credit cards for everyday purchases like groceries or gas and to pay for vacations, clothing and everything you buy. If you go back to these old spending habits, you may find yourself with a credit card balance you can’t repay.

You will not be eligible for prime, low-interest credit cards as you first begin to rebuild your credit. Most will have a minimum interest rate of 19.99%, and some will have an annual fee. Over-the-limit fees can be $29 or more, and if you bounce a payment, you may pay an additional $45.

To avoid these costs, use your credit card responsibly. That means charging only what you can afford and making timely payments. If your spending personality is to use what credit you have to buy things you don’t plan for, get a credit card for rebuilding but leave it at home when you shop. Later in this article, I’ll provide additional strategies to use your credit card to improve your credit score without getting into financial trouble again.

And it’s OK not to have a credit card. If you don’t need new credit in the future, you don’t need to worry about your credit score. So long as you have a bank account and debit card, there is no need for a credit card anymore. There are alternatives to credit cards you can use to make payments. Consider digital options that link to your bank account, like PayPal, for example. A prepaid credit card can be beneficial when you need to make a VISA or MasterCard type of payment.

Which credit card will help me improve my credit score?

Read Transcript

Now for the lesson you’ve been waiting for: how to re-establish your credit with new accounts. While I know everyone wants to jump into this part, it’s important to take the time to review your credit report and fix any errors. Old mistakes will mess everything up so that’s why I’ve waited until lesson number eight to talk about establishing new credit accounts. Before I explain what types of credit you need to rebuild your credit score, remember to always wait a few weeks or a few months between credit applications. New credit may temporarily lower your credit score so you don’t want to apply for a second credit card right after you got your first. 
OK let’s talk about what kinds of credit you need. The single most important tool for establishing new credit or rebuilding credit is a credit card. Why? Well because credit cards tick the box
for three out of the five factors we discussed in lesson three that can positively or negatively impact your credit score.
Here’s why: using your credit cards then paying off balances regularly helps you build a positive payment history. As your balances revolve up and down, credit bureaus can tell if you can control how much debt you use and the longer you use a credit card wisely, the better your credit score will be. A loan will help improve your credit score but the loan payment each month is fixed and you either pay it or you don’t so it doesn’t give you as great an opportunity to demonstrate that you are able to handle credit.
A credit card is different because it’s revolving credit. You control it. You decide when to make payments and how much to borrow up to your credit limit,  of course. That’s why a credit card is the best predictor of your ability to handle credit and why a credit card has the most impact on your credit score.
So can you get a credit card even before you’re finished your bankruptcy or consumer proposal? Yes if you really need a credit card during your bankruptcy or proposal, you can try getting a secured credit card. A secured credit card is backed by a deposit you give to the credit card company. They’ll use this deposit if you stop making payments which is why they’re willing to lend more to risky borrowers like someone in a consumer proposal. Getting a secured card can help you jump start your credit rebuilding enough to increase your chances that you qualify for a regular credit card after your bankruptcy or proposal is finished.
Be prepared though. Not everyone who filed a bankruptcy will be approved. Approval depends on your current credit worthiness including factors like your current income. Talk to your trustee or credit counselor to see if applying for a secured card while bankrupt is a good idea in your situation. Start by requesting a small authorized limit, say three hundred to a thousand 
dollars depending on how much you can save for the deposit. At the time of this recording, in my experience, Capital One is the best for active bankrupts, while for active proposals Capital One or Home Trust Visa are more likely to approve your application.
These cards generally come with a monthly or annual fee. Both charge high interest rates so be sure to pay your balance in full each month. Again your trustee or credit counselor can advise you on which card is best for you in your unique situation. Most major cell phone providers report to the credit bureaus. Paying your cell phone bill on time during your bankruptcy or proposal is very important. While it doesn’t help your credit score increase because the payment is small, paying late will hurt your credit score a lot. Don’t be late with your payments.
After you receive your discharge or finish your proposal,  you can start thinking about the two plus two plus three rule we talked about back in lesson number two. As a reminder, the goal if you want good credit so you can qualify for a low interest car loan or mortgage is to have two active established accounts, maintain a good payment history for two years on those accounts after your bankruptcy or proposal is complete, and those two accounts should have authorized credit limits of three thousand dollars or more on each card.
You might get credit faster but it may not be prime credit. It will likely carry a higher interest rate and may not look good on your credit report to future lenders. So here’s what I would do 
after my bankruptcy or proposal was finished. I’d start by getting a copy of my credit report and correcting any errors. That’s key. Then I’d apply for a regular unsecured credit card. Certain lenders are more willing to lend to someone with low credit like Capital One or Canadian Tire or what’s called Triangle now. If you don’t have good enough credit to qualify for an unsecured card, try applying for a secured credit card if you haven’t already done so.
And if one of those lenders was included in your proposal or bankruptcy, it’s probably best to avoid them during your rebuilding process. Pick another credit card lender. After six months of making payments on time, on your first new card, you have an increased likelihood of being approved for a second credit card. This can change but as of the time I’m recording this video, credit card providers like MBNA, TD, CIBC, and PC Financial in that order are good options assuming those creditors were not included in your bankruptcy or proposal.
Let me emphasize again: if your goal is to improve your credit score, the sequence of events is this: clean up any mistakes on your credit report, apply for one credit card with a small limit say three hundred dollars to a thousand dollars, wait a few months to apply for a different small limit credit card, wait a few months to ask the first card to up your limit, and then wait a few more months to ask the second card to increase your limit.
It takes time but that’s the safest way to increase your credit score. If you already have a car loan you may already have a decent credit score so you may not need a second regular credit card. As long as you’re making your car payments on time, this loan already shows you can manage a healthy mix of credit. Increase your limits slowly. Asking for a higher limit is asking for more credit which may mean a hit on your credit report. If your credit card provider offers you a limit increase without you asking, well then, take it if it brings your unsecured limit up to three thousand dollars or higher. 
A common question I hear is: Well should I pay an annual fee for a credit card? There are low credit lenders that will offer people in a bankruptcy or a proposal a credit card for a high annual fee. I generally advise that you avoid those. It might help you get a card a little faster but it’s at a high cost. Remember no matter what you do, it will take two years following the completion of your program to have fully re-established your credit. Paying a high annual fee to get a credit card a little earlier isn’t going to help a lot. So, the lesson is work slowly to rebuild new credit accounts while always paying on time and keeping your balances low.

Close Transcript

Should you decide to get a credit card after bankruptcy, here are some factors to consider before applying.

Should you get a secured or unsecured credit card? A secured credit card requires a security deposit, where the credit limit depends on your initial cash deposit. If you want a $1,000 credit limit, you need to save up that amount before applying. A secured credit card is easier to get, especially if you are still an active bankrupt. Secured credit cards can help you repair your credit score because you still make monthly payments, and your credit card issuer will report these to the credit bureaus. The security deposit is only used in the event you don’t pay.

Unsecured credit cards rely on a credit card provider’s assessment of your creditworthiness to loan small amounts to those with low credit scores. Once you can prove to the credit card company that you are responsible enough to pay off what you borrow, they may be willing to increase your credit limit.

Options can include a traditional Visa or MasterCard, or store card. My recommendation is to avoid cards that have an annual fee.

Several credit card issuers, such as Capital One or Canadian Tire, are more inclined to issue an unsecured credit card to someone with bad credit due to a bankruptcy or consumer proposal. Assuming these creditors were not included in your bankruptcy or proposal, credit card companies such as MBNA, TD, CIBC, and PC Financial, in that order, are good second card choices.

How does a credit card rebuild credit?

The main point of obtaining a credit card is to have a revolving credit account that gets paid off frequently and to have those payments reported to the credit reporting agency. Keeping a zero balance on the card while making adequate monthly payments will help increase your credit rating. 

To fully rebuild your credit to qualify for a larger loan, like a mortgage or car loan, you will ultimately need two new credit lines with a minimum limit of $3,000 – an unsecured credit card can help you with this.

However, this takes time. In most cases, you should be able to build a good credit score two years after your bankruptcy discharge or consumer proposal completion. Our recommended process is as follows:

  1. Clean up any errors on your credit report.
  2. Apply for one credit card with a small limit.
  3. Wait a few months to apply for a second card.
  4. Wait a few more months to increase your limit for card one.
  5. Wait a few more months again to increase your limit for card two.
  6. Always pay on time and keep your balances low.

You will notice I mentioned that you should wait between each stage. That is because applying for a new credit card, and asking for a credit limit increase, will show on your credit report as hard inquiries and will temporarily lower your credit score.

Credit card strategies that look good on your credit report

Once you have your new credit card, the two most important things to rebuild your credit are making on-time payments and keeping your balances low. Always avoid late payments. A missed or late payment on your credit card will result in interest charges and, more importantly, derail your attempt to repair your credit rating.

As long as the credit card company reports payment activity to the credit bureau, there is no need to maintain a monthly balance on your credit card to re-establish credit. Having a low utilization rate on your credit card at all times will improve your credit score faster, and in our experience, a utilization rate of zero is best. You can accomplish this by only using your credit card for a small recurring payment, like your cell phone bill or Netflix, then paying off the balance immediately. You do not need to wait until the end of the month or billing cycle to make a payment.

Having a credit card and not using it can help improve your utilization rate, but it’s still better to put a small charge on your card and show a credit history of regular monthly payments.

Good credit card habits for your finances

Yes, you wanted to get a credit card to rebuild your credit, but we know you may be tempted to use credit cards in your daily life. If you do, here are some tips to ensure you use your credit cards wisely so your balances don’t get out of hand.

  1. Until you know you can manage your budget, keep your credit card charges to a small recurring bill, which gets paid every month.
  2. Avoid large purchases because they increase the amount due on the monthly bills.
  3. Don’t take out cash advances, as you will pay interest right away. Using your credit card for cash likely also means you are not managing your money well.
  4. Don’t rely on your credit card for an emergency. Set aside a small cushion, say $500 to $1,000, in an emergency fund to cover you when you have an unexpected expense.
  5. Use your credit card as a payment tool, not a borrowing tool.

Obtaining a credit card and using it for small purchases only can increase your credit score and ensure that you don’t get into trouble with credit cards again.

Similar Posts:

  1. The Benefits of Making Small Micropayments Towards Debt
  2. How Long Does It Take To Get My Credit Back After Bankruptcy or Proposal?
  3. 5 Ways To Survive Without a Credit Card
  4. The First Step To Credit Rebuilding Is No More Debt
  5. Credit Cards: Before, During and After Bankruptcy (or Proposal)

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