What are the best credit cards after bankruptcy?

Don’t be surprised when credit card offers reappear in the mailbox within weeks following the announcement of the bankruptcy (it is a public record and published as such). A prime reason is that the consumer is not eligible for another discharge for two to eight years. Therefore, newly acquired debt must be paid. This means that for the creditor, the offer is almost risk-free.

Even so, the first cards offered will almost always be secured credit cards. With a secured credit card, a cash deposit is required and credit is limited to the amount on deposit. Charges are not deducted from the deposit, however; this is not a prepaid card. Instead, like any other credit card, charges appear on a statement and the bill must be paid. The deposit is only tapped in case of default.

Terms on credit products offered to newly discharged debtors are often less than attractive. However, it’s important to remember that the journey to recover a good credit score begins with the first step. Some credit cards actually help consumers begin to reestablish a solid credit history.

Not all secured cards are created equal. They differ in fees, interest rates, grace periods and reporting policies. Even after a bankruptcy, some offers are considerably better than others. Here’s how to tell which are worth considering.

Fees

Some credit cards are quite expensive to own because of the fees associated with them. First Premier Bank MasterCard Credit Card, a secured card, has been held up as among the most expensive cards on the market. For starters, there’s a $75 fee just to process your application. There is also a $75 annual fee for the first year ($45 per year starting in the second year). The cardholder also pays a monthly maintenance fee of $6.25 starting in the second year just for the privilege of owning the card.

Almost any other secured card is a better option.

Harley Davidson offers a secured Visa with no annual fee. Digital Federal Credit Union (DFCU) offers the DCU Visa Platinum Secured Credit Card with no annual fee and fee-free cash advances and balance transfers. (That said, cash advances and balance transfers are two steps to avoid if at all possible when you’re coming back from bankruptcy. See 8 Alternatives To A Credit Card Cash Advance and The Pros And Cons Of Balance Transfers.)

Interest Rate

Don’t focus too much on the interest rate. Even if it’s sky-high, it should not matter because it’s important that a bankruptcy survivor needs to learn how to avoid falling back into debt. When it comes to a credit card: Use it, pay it off. Use it, pay it off. Use it, pay it off. Focus on other factors. If all else is equal, it’s fine to choose the card with the better rate, but don’t plan to carry a balance. Ever.

Grace Period

A grace period is the number of days during each billing cycle that an account does not incur any interest charges. Only accounts that are paid in full every month can benefit from the no-interest period. Once there is a balance on the card, interest accrues on each purchase from the date of the transaction. Many secured cards do not offer any grace period at all.

The USAA Secured MasterCard and the DFCU card both come with a 25-day grace period.

Credit Reporting

A consumer’s credit will only improve if creditors report a positive payment history to one or more of the three major credit reporting agencies: Equifax, Experian and TransUnion. As an added bonus, many secured cards report as unsecured (this is more favorable to the consumer).

Secured credit cards that don’t report cannot help the consumer rebuild healthy credit.

Capital One’s Secured MasterCard reports to all three agencies.

The Bottom Line

Any of the cards mentioned above (except First Premier) are great choices for bankruptcy survivors. The features to look for are low fees, reasonable interest rates, grace periods and credit-bureau reporting. Call the toll-free phone numbers on the websites to find out the exact terms prior to applying, because they change periodically. For more information, see Getting A Secured Credit Card and Credit Cards For People With Bad Credit.

Consumers don’t have to stay in secured-card limbo forever: After they demonstrate responsible use (on-time payments) for a period of time (typically six to 12 months), they can apply for an unsecured card and request return of the security deposit.