When someone files for bankruptcy, they may realize that they have a lot of credit card debt. Many people try to stay away from using credit cards after bankruptcy. They are worried about getting into debt again, knowing that high interest rates can create a debt spiral that is hard to break, especially on a limited income.
But it is important to understand the nuances of credit cards and how some of them can actually be helpful after a bankruptcy filing. A secured credit card operates much differently than a traditional credit card, reducing risk for both the borrower and the lender.
Making a deposit
To get a secured credit card, one typically has to make a deposit that sets the balance on the card. A person may make a deposit of $1,000, for instance, and they can then charge up to $1,000 on that card, which they are supposed to pay off at the end of the month like normal.
The benefit for the creditor is that they already have the deposit. If the borrower defaults on their charges, the creditor simply cancels the account and keeps the deposit. They are not at risk of losing anything because they already have the money on hand.
The benefit for the borrower, however, is that making payments at the end of the month still helps to raise their credit score. When someone files for bankruptcy, their score is going to temporarily drop. But a secured credit card can be an excellent tool to rebuild that score.
Understanding the bankruptcy process
Rebuilding credit is just one thing to consider when looking into your bankruptcy options. Be sure you know what legal steps to take during this process.
