A little-known fact of filing for bankruptcy is that, soon after a consumer receives their discharge (usually within a week), that consumer’s mailbox is likely to be inundated with credit card offers. There are a few reasons for this. Firstly, credit card companies will receive notice of the discharge and that the consumer therefore has significantly less debts that would otherwise prevent repayment on a new account. Secondly, the mandatory waiting periods between bankruptcies means that a newly-filed consumer won’t be able to file for bankruptcy again anytime soon. Thirdly, believe it or not, many consumers-especially those who have struggled with debt for years-actually receive a bump to their credit scores during bankruptcy. Finally, and depressingly, filing for bankruptcy paints a consumer as a “mark”—in other words, someone who might jump to take a poor offer.
But filing for bankruptcy does not mean that a consumer will be limited to poor credit card offers. Likewise, it is not the case that a wise consumer should avoid credit card offers altogether. To the contrary, credit cards, smartly used, are the surest path to good credit after bankruptcy. Imagine a credit score like a scrolling newsfeed; new headlines are constantly being added, and old ones are constantly falling off. The goal of the savvy consumer should be to fill their creditor newsfeed with dull, reassuring headlines like “Martin Pays Bill on Time” or “Cassandra’s Visa Credit Card Turns Four Years Old.” Headlines like “Ryan’s Student Loan Remains in Default” are bad, and consumers with these sorts of headlines in their credit newsfeed should seek to bury them in more encouraging stories. Using and promptly paying on credit accounts is an easy way to do this.
But where to begin? Ideally, a newly -filed consumer should seek to open three to five credit cards after bankruptcy. This reflects a robust but not excessive level of engagement. Furthermore, these credit cards should be opened all at once, because the act of opening them, at least initially, will lower the average age of the consumer’s accounts and temporarily drop his or her credit score. This is because creditors prefer older accounts. Therefore, by opening the cards all at once, the consumer puts his or her best foot forward on each account. This bolsters his or her chances of acceptance on each card and will likely boost the cards’ initial spending limits. There are five factors a consumer should consider when selecting a credit card, and for the task of building credit, spending limit is by far the most important.
In order of importance, the five factors to consider when applying for credit cards are spending limits (higher is better), annual percentage rates (lower is better), annual fees (best avoided), security deposits (inconvenient), and rewards (always appreciated, but not a priority). The ideal credit card, therefore, is one with a sky-high spending limit, basement-level APR, no annual fees, no need for a security deposit, and great rewards. These sorts of cards are reserved for only consumers with the most stellar credit scores, however, so getting to that point will require making some sacrifices in the meantime. A consumer who can afford it would be wise to ignore rewards altogether and to pay high security deposits for secured credit cards with low APRs, no annual fees, and high spending limits.
Spending limits are important because credit utilization ratio is a key factor in calculating a consumer’s credit score. Ideally, a consumer is using his or her credit cards often, paying them off promptly, and only utilizing around 30% of their available spending limits. Therefore, a consumer with three credit cards with a combined spending limit of $3000 should seek to never carry a combined balance larger than $1000 between all three cards. Therefore, the higher the combined credit limit, the more wiggle room available to the smart consumer. Secured credit cards are convenient for increasing spending limits because the initial spending limits are set by the amount of the refundable deposit, not by the consumer’s credit score.
Consumers who have struggled with debt in the past, however, should be prepared for a possible setback: just because a person is willing to put a deposit down for a secured credit card does not mean that, even with the deposit, they will be approved. If this happens, there is no reason to panic. Most banks offer secured credit cards for their customers, and these cards have much higher acceptance rates than other secured credit cards. Good credit is not necessary for opening a bank account, just an initial deposit of a minimum amount. Therefore, consumers without a bank account need not worry about what will happen if they attempt to open one: most banks will set up an account for any customer with an income and an initial minimum deposit. Once an account is opened with the bank, applying for a secured credit card should be a simple process.
Starting out, building credit can be a frustratingly slow process. A consumer may not be able to qualify for three to five good credit cards initially. It is important for a consumer in this position to stay focused on the future and stay vigilant against exploitative credit card offers. Sites like nerdwallet.com and thepointsguy.com can be helpful for comparing credit offers. However, just as there are deceitful credit card offers, there are deceitful credit card rating sites. It is therefore important not only to research any credit card before applying for it; it is also important to do at least a little research on the credit card rating site one uses to compare credit cards. Selecting the right credit cards is, for most people, the most difficult part of the credit-building process. Once the cards are applied for and received, automatic payments can and should be set up. After this step, the process becomes simpler: just use the cards and check their balances regularly to make sure they are being paid off and aren’t being maxed out. A little effort in the beginning goes a long way. And with the proper preparation, the road to good credit is not only smooth—it is surprisingly short.