Right after bankruptcy, most consumers know that their credit options are limited.
For various reasons, most are eager to re-establish credit. It may be in an effort to rebuild credit scores so as to qualify for a mortgage or low-rate automobile loan; it may be the need for a credit card for transactions like hotel reservations and car rentals; it may simply be that the consumer is in a hurry to "start over" financially.
Whatever the motivation, the knowledge of limited options and a sense of urgency are a dangerous combination.
One of the most frequently offered options for post-bankruptcy or other high risk credit applicants looks and works just like any other major credit card, but costs far more.
Some consumers trying to rebuild credit after filing bankruptcy think they're seeing the light at the end of the tunnel when "pre-approved" credit offers start arriving, but accepting some of those offers will do more harm than good.
A look at some sample terms from the lenders who solicit post-bankruptcy debtors illustrates what's at stake.
One issuer of major credit cards for those with "less than perfect" credit charges an account set-up fee of $29, a program fee of $95, an annual fee of $48.00 and an annual participation fee of $72.00.
Of course, the consumer doesn't get to know what his credit limit will be before applying, except that it will be at least $250.
With a $250 credit limit and the above terms, a borrower will have $72 in available credit-and an outstanding balance of $178!
Taking on debt and getting nothing in return is a bad move for anyone trying to impose order on his financial life, but in this case, the harm is even greater.
One of the main purposes of applying for credit cards after bankruptcy is to re-establish credit, but carrying a high balance relative to available credit hurts credit scores.
And the debtor who has only one credit card with a $250 limit and a $178 balance is using 70% of his available credit.
Those with the highest credit ratings use, on average, 17.8% of available credit.
It isn't just one lender preying on high-risk and post-bankruptcy debtors this way. Another issuer of high-risk credit cards requires a $150 annual fee, a $29 account opening fee and a $6.50/month maintenance fee.
That card is issued with a limit of $300. That's a balance of $179 before the card is ever used, eating up 59.6% of available credit.
In addition, these accounts typically carry high or variable interest rates and stiff fees for late payments and over-the-limit charges.
With 70% of available credit instantly committed to fees and maintenance charges and interest added monthly, it's easy to inadvertently slip over that credit limit line.
And with many cards, late payments or credit limit overages will result in higher interest rates as well.
Of course, you can't expect the best terms and interest rates immediately after filing bankruptcy.
Those are reserved for those with high credit scores, and it will take a little time to work your way back to that point-or perhaps to that point for the first time.
Still, there are reputable companies you can work with to re-establish credit without paying unnecessary fees and putting your ability to keep accounts current at risk.
First, make sure that you're ready to re-establish credit. Getting overly ambitious can do more harm than good. Though it's helpful to re-establish credit early since longevity of accounts is one factor in determining your credit score, the harm that comes from making late payments after bankruptcy is much more significant.
Once you're sure that you're in a position to be able to make timely payments and keep balances down or paid off in full each month, be prepared to do some homework. Finding the right credit card to start out with after bankruptcy, and then the right lenders to work with as you continue to rebuild credit, takes research.
Remember, though, that "shop around" means doing your homework up front. It doesn't mean applying for a lot of different credit cards.
Not only might you end up with more credit than you want or need at that point-and paying fees on all of it-but you'll actually hurt your credit score. That's because each inquiry made to the credit bureaus counts against you. So you'll want to make sure that you've chosen a card with acceptable terms and, once you have a solid chance of being approved for, before you apply.
When you do apply for your first credit card after bankruptcy, carefully consider key factors such as the interest rate, annual fees, the grace period on purchases and any additional fees.
You're establishing a new relationship with credit, one in which you're in control, and you can't allow yourself to be pushed into making bad credit decisions because you feel you don't have options or because you haven't adequately researched the offer.
Depending on your circumstances after bankruptcy, it may take a year or two or three before your credit scores command premium treatment-until then, consider reputable post-bankruptcy lenders and make sure that you understand the terms you're accepting thoroughly.
Then, when your credit is re-established, don't forget the lessons you've learned here.
The fact that you qualify for the best terms a lender offers doesn't mean that you'll automatically be extended those terms.
Make sure that you put the same kind of research you invested in your first post-bankruptcy credit accounts into all of your future credit transactions.
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