Concerned about getting a MasterCard or Visa credit card after bankruptcy? A lot of people think that a bankruptcy effectively ruins their chances at obtaining credit for a very long time. LoveToKnow Credit Cards recently spoke with Lita Epstein, author of The Complete Idiot's Guide to Personal Bankruptcy, to help dispel some of the concern about getting a credit card after bankruptcy.
Interview with Lita Epstein, Personal Finance Expert
LoveToKnow (LTK): Can you tell our readers a little bit about your background and experience?
Lita Epstein (LE): I'm a personal finance writer with over 25 books on the market. I earned my MBA from Emory's Goizuetta Business School and have since helped many people recover from serious financial hardships and mistakes.
Restoring Good Credit
LTK: How long does it take to get good credit restored after bankruptcy; particularly in regards to getting a credit card with a good rate?
LE: There are many factors that play into how long it will take to restore good credit and get a good credit score. For example, if bankruptcy was the end result of a temporary financial hardship, such as a job loss, and a new job with a good salary was then attained, recovery would be much faster than for someone with a serious medical problem who is not able to work. The key to rebuilding a good credit score is showing that you'll pay your bills on time and that you can manage credit cards wisely.
LTK: Is there anything a person can do to try to speed up the process of cleaning up his or her credit?
LE: The first thing one must do to clean up credit after a bankruptcy is to get a copy of each of his or her credit reports from the three major credit bureaus - Equifax, Experian and TransUnion.
Correct any mistakes. Be sure to change any negative credit card reports to indicate that the debt was discharged in bankruptcy. That will set the clock for when the debts will be removed from the credit report. All bad debts, other than the actual Chapter 7 bankruptcy, must be removed seven years after the last activity on the debt. A Chapter 7 bankruptcy is removed after 10 years.
Also, if there are any collection activities shown on your report from a collection agency for debt that was discharged during the bankruptcy, ask that they be corrected to show the debt is discharged. Collection agencies will sometimes renew these claims even after they've been discharged by a bankruptcy court and you want to be sure to start the clock for removal of that negative report as soon as possible.
LTK: Is there a way to get bankruptcy off a person's credit in less time than seven years?
LE: A Chapter 7 bankruptcy stays on your record for 10 years. A Chapter 13 bankruptcy is removed after 7 years. This is a public record and there is no legal way to get it removed earlier. But, as a negative ages, the impact on one's credit is minimalized.
As you apply for credit in the future for a major purchase, such as a house, don't hide the fact that you filed for bankruptcy if it's still on your records. Be upfront about it, explain the circumstances and work with a mortgage broker who can steer you to the types of lenders who will finance someone with a bankruptcy. As the bankruptcy ages, it will be less and less of an issue as long as you've paid all bills on time since the bankruptcy.
Getting a MasterCard or Visa Credit Card after Bankruptcy
LTK: What can a person do to make himself or herself a better credit risk in the meantime, perhaps to get that starter credit card?
LE: After your debts have been discharged during a Chapter 7 bankruptcy, you are actually less of a credit risk than most people. Your debts are cleared and you have a fresh start. You can't file bankruptcy again for at least six years. Many people I've helped find they are inundated with secured credit card offers after a bankruptcy discharge.
Secured credit cards mean you must have a savings account that is equal to the debt you are permitted on the card. You can use these cards to show you can manage debt wisely and will pay your bills on time.
Usually, if you handle your cards well with no late payments, you'll be able to get a regular credit card with a relatively high interest rate in about six months to a year. Again, your credit limit will be low, but you can still use it to show that you'll manage your debts wisely and pay on time.
As long as you pay on time 100% of the time and don't charge up to your credit card limit, you'll find your credit score improving monthly. One way to keep your utilization looking good on a credit report is to pay your bill just before the close of a statement. That way a lower balance will be reported to the credit bureaus and you'll look better.
Gradually, as your credit score improves, your credit limits will rise. When you see your credit score above 650 you can check with your current card company to see if it will lower your interest rate, or you can apply for a new card. You'll get the best rates when your score is over 740, but that can take three to four years of a good credit history after bankruptcy.
LTK: What are some of the credit cards a person should consider applying for with a bankruptcy on his or her record?
LE: Initially, you're only choice will be a secured credit card, but after about six months to a year, as long as you are employed and can show a regular paycheck, you should be able to shift to traditional credit cards.
LTK: If a person thinks he or she will have trouble getting a MasterCard or Visa credit card after bankruptcy, would it be wise for that person to simply refrain from applying for credit until the bankruptcy is removed?
LE: No, that's a bad idea. You need to prove to the banks that you can handle credit wisely and pay your bills on time for your credit score to improve.
Monitor Your Credit
LTK: Do you have any additional tips or advice for a person in this situation?
LE: Monitor your credit history at least once a year. You can do that for free by ordering a credit report using Annual Credit Report. Correct any errors you see and be sure that all debt that was discharged shows the discharge in a note so a creditor can't continue to report on that debt and extend the length of time the negative report will be on your credit report.
You can monitor how your credit score is doing for free on a monthly basis at CreditKarma.com.