Obtaining a discharge in a New York bankruptcy usually improves one’s creditworthiness just by eliminating bad debts, but that doesn’t mean a debtor’s post-bankruptcy credit score will be remarkably great. However, there are steps former debtors can take to raise their credit scores. One option that doesn’t come up often is using so-called “secured credit cards.” What are these and how can they help debtors after bankruptcy?
Credit card debts are unsecured debts, meaning the debtor doesn’t pledge any collateral to the bank in case of a default unlike what happens in an auto loan or a mortgage. As a result, credit card interest rates tend to be higher than rates for secured debts. A secured credit requires the debtor to deposit money with the lender as collateral before the card can be used. Typically, banks will ask for $300 to $500 up front. If the debtor doesn’t pay the credit card bill, the lender can recover the money that the debtor deposited. Usually, the credit card is limited by the amount the debtor deposited or some percentage above that amount.
There are some benefits to using a secured credit card, especially after a bankruptcy discharge. One, the cash collateral deposited with the bank will earn some interest. Two, regular, timely payments on a secured credit card can help improve one’s credit score when banks might have been less likely to extend credit otherwise. The lender may even offer to raise the credit limit with an increase in the deposit account.
There are, on the other hand, several drawbacks to bear in mind before getting a secured credit card. Generally, they require the cardholder to pay annual user fees. Sometimes lenders can charge higher interest rates than unsecured cards, and worse, they may require monthly insurance policies that provide debtors with no real benefit. Finally, the collateral deposit will tie up the cardholder’s resources for as long as he or she has the card.
Secured credit cards can be a useful way of rebuilding credit provided the monthly payments are made on time. Those interested in finding one should be diligent about the process to ensure that they aren’t paying needless fees or insurance charges. Credit unions are a good place to look as they tend to offer better terms than larger banks.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.