Reader Question: Credit Cards for Rebuilding After Bankruptcy

Jene wrote in with a question over the weekend:

I didn't know when I filed for bankruptcy 5 years ago that it would haunt me like the plague. I have recently begun the journey of improving my credit.  I got several of those unbelievably high fee cards you can't afford to use. I have been paying on time but they are not reporting to credit bureau.  My FICO score is 605. I want an unsecured low fee card with credit limit of $300-$500 dollars. I have hurt myself with inquiries looking for one unsuccessfully. Can you help? 

Bankruptcy records will harm your credit score for 7-10 years, but the amount of damage can be reduced dramatically if you take some steps to rebuild early on.  It is a good idea to open a new account and start using it responsible as soon as you can after your bankruptcy is discharged. The earlier you can add positive records to your credit reports again, the quicker your score will improve. You can read more about rebuilding after a credit problem here.

Unsecured vs. Secured Cards
An unsecured credit card is a "traditional" credit card where the credit limit is granted to the consumer based on their credit score and income. The majority of credit cards in use are unsecured. The problem is that unsecured credit cards for customers with credit problems usually come with expensive fees and rates. That's just the way it works: bad credit = bad terms.

Secured credit cards break the mold though. These cards require the consumer to put a cash deposit into a savings account to "secure" the credit limit. Usually with a minimum starting deposit of $300 and a maximum of $10,000. The amount earns interest while in the savings account and is not touched. A $300 savings deposit would get you a secured credit card with a $300 credit limit. The secured card reports to the credit bureaus each month and works just like a regular credit card. After 6-12 months of responsible use, the secured card can turn into an unsecured account and the savings deposit is returned.

Because the creditor with a secured credit card isn't taking a risk when granting the credit line, the fees and rates are much lower than you'd have with an unsecured subprime credit card.  It is a much better deal for someone who wants to improve their credit.

Pre-Paid Cards
Pre-paid cards or debit cards are often grouped in with secured and unsecured credit cards. But these pre-paid accounts are not credit cards, don't report to the credit bureaus and don't help rebuild credit. They largely serve the unbanked and allow direct deposit onto a debit card in exchange for expensive fees.

Finding a Card
Post-bankruptcy consumers can get bombarded with credit offers in the mail. The majority of these offers aren't worth the paper they're printed on.  You're much better off looking online for a new credit card or loan. Make sure you can compare all the fees and rates. If you have questions, don't be afraid to call the company and ask before applying. You can browse secured card offers online here.

Jene's credit score is already on the road to improvement. Another 70 to 100 points and she should be able to qualify for an unsecured credit card without all those pesky subprime fees.   

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.