You may have heard people say they won’t use credit cards because they’re afraid of bankruptcy. They worry that credit cards will create a high level of unaffordable debt, leaving them with no way to escape it without declaring bankruptcy, liquidating assets and taking other significant steps. To avoid this, they simply don’t use credit cards at all.
There is something to be said about the link between credit cards and bankruptcy. After all, some bankruptcy cases happen in part because consumers overspend. Credit cards make this easy because users don’t need to have the money on hand to make a purchase. Additionally, credit cards often have very high interest rates, which can cause debt to escalate quickly.
Secured credit cards
However, once someone declares bankruptcy, a credit card may be exactly what they need. Their credit score is going to take a hit during the bankruptcy filing, and one of the important things to focus on in the years after bankruptcy is building that credit score back up. This can be done using a secured credit card.
A secured credit card requires the borrower to put down a deposit at the beginning. The limit on the card is the same as the deposit. If the borrower makes their monthly payments, their credit score improves and they may eventually qualify for a traditional (unsecured) credit card. But if they miss payments, the company can keep the deposit to cover the balance. This makes it a low-risk way to repair a credit score.
If you’re considering bankruptcy, it’s very important to understand your legal options, know what steps to take and consider how to address your financial future.