The decision to declare bankruptcy can be difficult, but it is often the first positive step toward financial wellness. The problem is that trying to rebuild your credit after bankruptcy can be very difficult, as using credit cards to maintain good credit is a necessity; however, receiving approval for traditional credit cards after a bankruptcy is challenging.
This is where secured credit cards come in. According to NerdWallet, a secured credit card requires a deposit that acts as collateral.
How does a secured credit card work?
In order to receive a secured credit card, you will have to put down a certain amount of money on the card. This amount of money will then act as collateral and the max limit of the card. So, if you put down $500 of collateral, your secured credit card will have a $500 limit on it.
Essentially, the money acts as a security blanket. If you do not repay your debt on a secured credit card, the issuing agency will simply take your collateral amount.
How can this help me rebuild credit?
Just like a traditional unsecured credit card without a collateral requirement, secured credit cards report to the three major credit bureaus. If you keep your credit balance on the secured card low and pay it off regularly, this will work in your favor.
Secured credit cards are often a much safer choice after a bankruptcy as compared to unsecured credit cards. In many cases, the interest that unsecured credit cards charge to those with poor credit is extremely high. Secured credit cards allow you to rebuild credit in a responsible manner without dealing with very high interest rates.