We inform our clients that after their bankruptcy is done, they will get solicitations in the mail for new credit cards, car loans and furniture loans. But you need to be careful when you get your first credit card after bankruptcy. There are traps for the unwary. This very good New York Times article explains what to be aware of. We provide our own advice below.
There are many reasons why a creditor will solicit you for a new credit card. Among them is the fact that you just got out of debt. Think about it. You have NO MORE DEBT. For better or worse, you are now considered a good credit risk no matter what your credit score says. Also, you will not be able to file a chapter 7 bankruptcy for another eight years. So there is a good chance that you won’t be able to get rid of this credit card debt anytime soon. (Yes, you can get a chapter 13 discharge within the next two years, but that is not the focus here). Also, for good or bad, many people that come out of a bankruptcy are very eager (or even desparate) to begin reestablishing their credit
Most of the credit card offers you get after bankruptcy, for lack of a better word, suck. The credit line is very limited. Normally your credit line runs from $300 to $500. In return for this credit card, we have seen companies charge a “set up” fee of $75, your first annual fee of $45 and even an application fee. The companies charge you a “monthly service fee” of $5 and as the New York Times article shows, even $4.95 to get paper copies. The bottom line is that your $300 credit limit can be charged over $150 in “fees” before you even use it. And yes, you have to pay that back.
I always stress to my clients that IF you get a new credit card after bankruptcy, then you MUST pay it on time. This is your new credit. You cannot screw it up so soon. You have to pay on time and better yet, pay it ahead of time. Most of the high risk credit card companies will charge you exorbitant(but legal) late fees for not paying on time. WATCH the due dates. Some of these companies almost intentionally force you to pay late if you pay online by not posting your payment for seven days. So don’t wait until the day it is due. Pay it ahead of time. Know when you can pay online and be within the due date.
This almost doesn’t need to be said, but it does need reminding. Even though you are receiving a credit card offer in the mail, you are still a high risk debtor. This means high interest rates. You will not get 9%. You will get upwards of 20%. This is a known quantity and it is your penalty for using this type of company for the sake of having a credit card. However, what is not known, and what is buried in the credit card agreement is the penalty interest rate that can be applied to your account.
If you pay late, you will be assessed a higher penalty interest rate. If your current interest rate is 20%, then expect the penalty rate to be 34% or more. This is insane, but legal. If you did the math, you would NEVER borrow money at 34%. That is a legal license to steal. But you agreed to it. You don’t have to let it happen to you if you Don’t Pay late! You can be assessed the penalty rate even if you were only late paying it one time. There are ways to get it reduced, this may involve paying on time for 6 months or one year, but it depends on the company that issued the card. Read your credit card agreement for the specific terms.
In some cases, it doesn’t even matter if you are late on this card. If you have other credit card debt and are late on payments to one of your other cards, your current issuer could penalize you on that basis too. So be careful.
It is not only possible, but quite easy to get a credit card after bankruptcy. But be careful. You are getting the solicitations precisely because you filed for bankruptcy. The card issuers know that some of you are eager (or desperate) to reestablish your credit and they use that against you. So don’t necessarily jump at the first card offer you get. READ the terms of the offer and when you do get the card and READ the credit card agreement. Understand when the payments are due, understand what miscellaneous charges are being assessed against you and understand the penalties for paying late. Be an informed consumer.
Remember, when it comes to credit, time heals. So if you wait awhile to get a new credit card, it will not hurt you. Your credit score, over time, will improve whether or not you establish new credit accounts or not.
Getting a credit card after bankruptcy can come with pitfalls. Don’t let it affect you. For all of our clients, we are here to help you even after your bankruptcy is done. If you need advice about what type of credit to get or even to compare credit cards, we are here to help. That’s what we do for our clients. The law firm of Busby & Associates has helped a number of their clients reestablish credit after their bankruptcy case was completed. If you need help with this issue or if you need help with your debts, please give us a call.