If you have bad credit due to a string of missed or late payments, collections, or even a bankruptcy, you know how much of a toll a simple mistake can take on your credit. No matter how long it’s been since negative information showed up on your credit report, it is never too early to start rebuilding your credit. Taking the right steps today can lead to thousands of dollars in interest savings in the future, so no matter how it happened, don’t delay in starting on the path to fixing your bad credit.
Starting Over without a Fresh Slate
While bankruptcy might appear like a path to a fresh start, for your credit score it is anything but. When you declare bankruptcy, some of your debts are forgiven in exchange for a big, bad mark on your credit report.
Depending on the type of bankruptcy, it will show on your credit report for seven or ten years. As long as the bankruptcy is present on your credit report, you may struggle to get approved for new credit and should expect higher interest rates than you had before bankruptcy. However, even though you do not have a fresh slate on your credit history, you can take steps to start over with credit.
If you can commit to taking the right steps with credit from this point forward, you are setting yourself up for personal finance success when the bankruptcy eventually ages off of your credit report. The best place to start with credit post-bankruptcy is with a secured credit card.
What is a Secured Credit Card?
A regular credit card is issued on credit with the assumption that you will pay back any funds you borrow. With negative information on your credit report, banks and other credit card issuers are less likely to offer you a credit card because they are worried they won’t be paid back.
With a secured credit card, you are required to make a refundable deposit equal to your credit limit. If you want a new card with a $1,000 limit, you have to deposit $1,000. If you want a $2,000 limit, you must deposit $2,000, and so on for bigger credit lines.
Once your account is open, it works like any other credit card. You can make purchases and pay your bill each month without impacting your deposit. If you ever stop making payments, the bank can seize the deposit and use it to cover your unpaid balance. If you keep the account in good standing, you will get your full deposit back when you close your account in the future.
How Can I Use a Secured Credit Card to Rebuild Credit?
When you file for bankruptcy, most, if not all, of your existing credit card accounts will be closed. It takes seven years for old credit card accounts to age off of your credit report. That’s a good thing for you, as those accounts are typically filled with a negative payment history. In the meantime, you can use a secured card to ensure that only positive information is left behind when the negative accounts eventually fall off your report.