Bankruptcy eliminates major debts through a court-ordered discharge. It may also limit access to credit, such as credit cards. Most lenders immediately freeze or close revolving lines of credit upon learning of a pending bankruptcy filing.
Filers may then struggle to manage their finances due to the inability to use revolving lines of credit. They may also struggle to rebuild their credit scores without proof that they can use credit responsibly. Secured credit cards can play a major role in the credit rebuilding process after a successful bankruptcy.
What is a secured credit card?
Most credit cards are unsecured revolving lines of credit. The lender offers the credit based on the card holder’s income and credit history, allowing them to spend up to a specific limit as long as they make minimum monthly payments.
Secured lines of credit require a deposit paid by the cardholder. They then use the card and make payments as normal. The deposit serves to protect the lender in the event that the borrower eventually defaults.
Secured lines of credit are often the first credit products available after a successful bankruptcy filing. They allow those with a recent bankruptcy to begin rebuilding their credit within a matter of weeks after a discharge in many cases. They also help people develop healthy habits regarding their use of credit and the payments they make. The appropriate use of a secured credit card can lead to better credit opportunities within a year or two.
Learning more about life after bankruptcy can help people strategize when dealing with financial pressure. A secured credit card is one of several important tools for rebuilding after a bankruptcy discharge.