Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
My husband and I declared Chapter 13 bankruptcy. We cannot rebuild our credit because no one will give us the opportunity to do so. I have tried all the recommended secured cards and have been turned down. What do we do now? At this rate in five years when our plan is complete, we will be in the same boat we are in right now. -- Sherri
No matter who it's from, rejection stings. To recover, you've got to hold your head up high, walk away and do something else. Don't delude yourself, though. When a multitude of issuers have turned you down for even secured products, they're sending an indisputable message: At this time, you're simply not what they're looking for in a cardholder.
Of course this raises the question of why credit card companies are giving you the heave ho. Though I can't speak for them, I can give you my professional best guess as to what their reasons most likely are.
It likely boils down to two key factors: affordability and credit rating.
According to their calculations, you don't have the means to simultaneously pay the debts that you're currently dealing with plus add another payment for a new line of credit. They know this based on the income you listed on the application as well as the obligations they discovered from your credit reports.
It makes sense, too. Your Chapter 13 payment was was based on your household bills and your income. What is left over is routed to your creditors. The trustees overseeing such cases rarely give much extra leg room for additional expenses, and that includes a credit card balance.
The other factor pertains to your credit rating. If you're like most people who have recently turned to the bankruptcy process to deal with their creditors, your FICO scores are quite poor. The damage is most egregious in the first couple of years after filing. As Chapter 13s are payment plans lasting up to five years and you have that much remaining, you've just begun. That puts you in the high risk category.
Mind that creditors also see and may judge the activity that led to the bankruptcy in the first place. All derogatory information that preceded it and that remains on your credit report is apparent. Evidence of late payments, collection accounts, monitory judgments, defaulted student loans, and debts not included in the bankruptcy can scare off a lender fast.
Regarding secured credit cards, typically they are a great way for people with damaged credit to get back in business. The money you put down as collateral reduces the issuers risk, since they can simply claim the funds on hold in case of default. However they still have standards, and for the stated reasons, you're not meeting them at this stage.
No fear, though, Sherri. Eventually you will be eligible for a secured card. And after that, one that requires no deposit.
As the months pass and your debt declines, your credit rating will naturally escalate. Check your FICO scores after a year to check where they are. The higher those numbers, the more apt an issuer will be to welcome you in as a customer. Before trying again, however, be sure to communicate your desire for credit with your trustees. They have to agree to all new credit obligations, so you'll need their permission first.
See related: Your map through Chapter 7 and Chapter 13 bankruptcy
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