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how long should you wait after bankrupsy to apply for a credit card to rebuild credit
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ljenkins21

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Credit cards after a bankruptcy are a tricky thing. They're a necessary part of rebuilding your credit, but they can really get you in trouble if you're not careful. Tread cautiously, because you're in a very vulnerable situation, and they WILL take advantage.

You'd think that after a bankruptcy, it would be next to impossible to get a credit card. I can tell you from experience that the opposite is true. Often credit card companies will start sending you offers right away. There's a couple of reasons for this, and you must understand them to stay out of trouble:

#1 Your debt-to-income ratio just went to 0. This is kind of a "false positive" effect on your credit worthiness. Because all of your debts are discharged, your super-low D2IR may make you pop up on some companies' radar. Once you put in an application, though, they will realize it is because of a bankruptcy and may not approve you.

#2 Because you just had a bankruptcy, you are a high-risk borrower, which means the credit card companies can legally charge you much higher rates and fees. Since these items are 100% of their profit, some companies will, in essence, "roll the dice" on you. In fact, a few companies such as Orchard Bank and Fleetwood Bank specialize in this type of card. They start you out with a very low limit (usually $200-500), give you a super-high interest rate (20-30%), and sock you with heavy fees right up front (sometimes eating up as much as 95% of your credit limit). This produces a giant return on investment if you pay your debt and limits their risk if you don't. It sounds predatory, but to be fair, they ARE taking a big chance on an asset (namely, you) that's already proven to be unreliable. Managing your downside is essential business strategy.

And #3 (the MOST IMPORTANT reason!) Once you file for bankruptcy, you can't file again for 7 years. This more or less makes any debt you take on after the bankruptcy a secured loan. You can't file again, so no matter what, you HAVE to pay that credit card. Again, it limits the company's risk.

Bottom line, if you want to get started building your credit back, you'd better be able to pay your debt. The timing doesn't matter anywhere near as much as your income situation. If your income is steady and you can pay your basic expenses(rent, food, utilities, etc) both comfortably and consistently, then getting a credit card is a good idea. You'll end up paying for the priviledge, but the whole idea is to leave Orchard or Fleetwood once you can get a better deal, so pay them their pound of flesh religiously and on time and move on with your life, and the sooner the better. Just remember, if you default on your new card, you're going to be much MUCH worse off than you are now, so if your income won't support it, then it's time to Just Say No. Concentrate on raising your income and/or lowering expenses, and leave the credit rebuilding for another day.

Bankruptcies stay on your credit report for 7 years (sometimes 10), and as long as it's on there, it's going to negatively impact your credit. The effect does diminish over time, but not much. If reestablishing credit is a low priority to you, then you might want to wait a few years before applying for a new card. This is what my parents did when they went bankrupt. Honestly, though, the time that passed since the bankruptcy didn't dramatically increase their acceptance rate, and the card they did finally get 5 years later was still a low limit, high interest card, although the fees were much lower.

I don't think there's really a general "right answer" to how long to wait. The bankruptcy will stay on your record regardless...how much it affects you depends on how much of your total credit picture it represents. The more good credit behavior you have, the less the bankruptcy will matter. Your credit report is just like a resume, so think about what it says to a prospective lender. Bankruptcies, charge-offs, and foreclosures all scream "I'm unreliable. I don't pay my debts. If you lend me money, you won't get it back." On the other hand, things like good clean payment history, proper debt-to-income ratio management, and responsible credit utilization all tell a lender "I'm a safe investment. Lend me money, I'm good for it." If being able to borrow money is important to your lifestyle, you need to start racking up those brownie points right away. If not, then I would suggest waiting the full 7 years until the bankruptcy drops off your report. Then you'll be a clean slate, and building credit will be easier.

I hope this helps. Good luck!

Response by
VTemple1

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This was the best breakdown to the question asked that I have read or even heard.  Thank you so very much. Very helpful. 

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MacnTra

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