Although filing bankruptcy impacts your credit, it relieves crippling debt and allows you to rebuild your credit.
After completing a bankruptcy, you can prove your creditworthiness by using a credit card responsibly.
In this guide, we’ll go over how bankruptcy affects your credit options and show you an easy way to get a credit card after bankruptcy in Canada.
How long after bankruptcy can I get a credit card?
When you have bankruptcy on your credit report, you will likely be refused a regular credit card for a year or two.
Credit card companies check your credit report to look for evidence that you are reliable at repaying credit, like payment history, employment, income, debt-to-credit ratio and debt-to-income ratio.
A potential lender is likely to consider you a high risk for the following reasons:
- Your bankruptcy appears on your credit report.
- You don’t have good payment history because your creditors were included in your bankruptcy.
To overcome these barriers, you must establish new lines of credit, like a credit card, but it can be difficult to get one. It’s a chicken-and-egg dilemma. Fortunately, there is a way to get a credit card after bankruptcy which we will discuss next.
Can I get a credit card after bankruptcy?
A credit card lets you establish a strong payment history on your credit report. Credit card options are limited for people straight out of bankruptcy, but alternative options are available.
Here are some of the ways to get a credit card after bankruptcy:
Secured credit card
A secured credit card is an excellent alternative to a regular credit card without worrying about the balance spiralling out of control. The only difference is that you pay a security deposit which becomes your credit limit.
For example, if you deposit $500, you’ll typically be given a credit limit of $500. Often you can deposit as little as $50.
Purchases are not deducted from your deposit, and you pay your bill like a regular credit card. You are charged interest if you carry a balance.
Use of the card is reported to the credit bureaus, so you can use the card to rebuild your credit after bankruptcy. Payments on time improve your credit, while late payments damage your score.
When your credit has improved, you will be eligible for a standard credit card. When this happens, you can pay off the secured credit card balance in full, and your security deposit will be refunded.
Prepaid credit card
A prepaid credit card lets you deposit money onto the card and spend the balance. Once the balance is spent, you must add more funds. There is usually a fee to add money to a prepaid card.
Prepaid credit cards cannot help you build your credit because they do not report to the credit bureaus.
Okay, a debit card isn’t a credit card, but it’s a simple but effective way to pay and manage your money.
Money is taken immediately from your bank account during the transaction, which can help you live within your means. We recommend using a debit card alongside a secured or unsecured credit card.
Authorized user of a credit card
A friend or family member can make you an authorized user on their credit card. This helps repair your credit, and your poor credit history will not damage theirs. The primary cardholder is liable for the account, so there must be a bridge of trust between both parties.
Unsecured credit card
When your credit improves, you can apply for an unsecured credit card. This type of card does not require a deposit.
If your bankruptcy is recent, you’ll likely be offered a card with low limits and a higher interest rate. A higher credit score allows you to access better credit card offers.
Tips for securing a credit card after bankruptcy
Check your credit report
Before you apply for any credit, get a free copy of your credit report from Equifax or TransUnion. A credit report records how you use credit products, such as credit cards and loans, and records owed amounts, missed payments, and information about your bankruptcy.
Report errors on your credit report
Once you have been discharged from bankruptcy, unsecured debts should no longer appear as owed. If any errors appear, notify the credit bureau and provide a copy of your discharge certificate.
Pay your bills on time
The best way to build credit is to pay bills on time. Payment history accounts for 35% of your total credit score calculation. Paying your credit accounts on time shows lenders that you are reliable.
If you miss a payment or make a late payment (over 30 days since billing), your lender will notify the credit bureau, and it is marked as late, which damages your credit.
It can be helpful to use automatic bill payments to ensure you don’t miss a payment.
Keep your debt-to-credit ratio low
Your debt-to-credit ratio, or credit utilization, is the percentage of your used credit compared to your total credit limit and has the second biggest impact on your credit score. To calculate your credit utilization, add up the credit limits across all your lines of credit, like credit cards and loans.
Aim to use less than 30% of your available credit. For example, if you have a $500 credit card, you should keep your credit utilization ratio below $150.
How to improve your credit utilization ratio:
- Make more than the minimum monthly payment.
- Accept offers to increase your credit card limit.
- Spread a high balance over other lines of credit.
- Add more lines of credit to increase your total available credit.
If you are searching for a regular credit card after bankruptcy, your application will likely be rejected for a couple of years.
A good strategy is to start with a secured credit card to rebuild your credit. Use it sensibly and pay your balance on time every month, and you’ll be approved for an unsecured card in no time.
If you need help with credit card debt, loans, tax debt, or anything else, speak to a Licensed Insolvency Trustee today.
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