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Bankruptcy can be one of the most traumatic experiences that that anyone's personal finances can endure. At the same time, bankruptcy can also represent a sort of re-birth of one's financial history. Those who emerge from bankruptcy will have a very low credit score, but they can look forward to steady improvement so long as they turn over a new leaf and manage their finances responsibly.
The first thing that everyone thinks when they emerge from bankruptcy is, "How am I going to re-establish my credit, if no one will give me a loan?" Thankfully, secured credit cards are available to applicants who have completely discharged their bankruptcy. Here are 4 valuable tips on how to rebuild your credit score with secured credit cards.
1. Only consider getting a secured card from a reputable, major bank. Secured credit cards require that a refundable security deposit be given to the card issuer, but otherwise these work like standard credit cards. Cardholders must make monthly payments, and can incur interest charges when they carry a balance. The most important feature of secured credit cards is that they report payments to the major consumer credit bureaus, which allows cardholders to re-establish a positive payment history.
One of the potential problems with secured cards, however, is there are many products offered with high fees and terrible terms. Always scrutinize the fine print to ensure that car has a reasonable annual fee, not a monthly fee. Also, be sure that the secured card you choose offers a grace period so that you can avoid interest by paying your statement balance in full and on time.
Major banks offering secured credit cards include Capital One, Bank of America, US Bank, and Wells Fargo. On the other hand, look out for companies that have names that sound similar to a well known major bank. These are the "diamonelles" of the financial industry, which are just cheap imitations of the original.
2. Become obsessed with paying your bills on time. Most credit card holders can pay a bill late every now and then without doing too much harm to their credit. Those who have emerged from bankruptcy do not have that luxury, especially since your payment history makes up 35% of your FICO credit score. When rebuilding your credit, every monthly payment counts and you need to set up whatever system is necessary to ensure on-time payment. Start by paying your bills electronically through your bank's online payment system. Then, set up any monthly reminders that are offered by the bank that you pay bills from, and any companies that you pay bills to. Finally, be sure to have some sort of backup reminder system on your mobile phone, or even just a big calendar you keep on your wall.
3. Use your secured card as a method of payment, not a means of finance. The best way to use secured cards, or any other credit card, is just to pay for purchases that you can already afford. You then avoid interest by paying each month's statement balance in full. Not only do you end up paying less, but paying your monthly bill just becomes a matter of paperwork, not a quest to come up with the necessary funds. And by carrying very little debt, your credit score will rise more quickly.
4. Graduate from secured cards after one year. After you have spent 12 months using a secured credit card, and paying every bill on-time, you can consider applying for a standard credit card. Start by asking the company that issued your secured card if you qualify for a standard credit card. Also, you could consider opening up a store charge card at your favorite retailer. What's important is that you take some baby steps, and not try to qualify for the top of the line rewards credit card.
*Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.