How to Rebuild Credit, Post-Bankruptcy

Dear Alpha Consumer,

My wife and I just emerged from bankruptcy. Before that, we both had excellent credit scores and access to good credit cards with major lenders. Unfortunately, I've been laid off three times since 9/11 because of company downsizing, and we had to charge our health insurance COBRA payments and food and other essentials to our credit cards. We only started making late payments on the advice of our lawyer, who said we had to be late prior to filing for bankruptcy.

Now, I am employed again and we are trying to rebuild our credit. We have one joint account in good standing but we would like to get a credit card or two to rebuild our credit. Should my wife and I each get a credit card under own names, or should we take out a joint credit card? Also, is it better to get an unsecured card with a higher APR or a secured credit card with a lower APR?

Lastly, if we pay off the balance each month and make on-time payments, do you know how long it will take before we rebuild our credit score and are able to get low-interest, unsecured cards from national lenders again?

First of all, congratulations on getting back on your feet after filing for bankruptcy. The good news is that you could have decent credit again within a year. The bad news is that even with improved credit, you probably won't be able to find the low-interest rate credit cards that you remember from your pre-bankruptcy days.

[See also: "How to Recover from Bankruptcy."]

The credit card world has changed drastically in the last two years. Credit card offers used to be plentiful; almost anyone with a mailing address could receive an unsecured credit card at a competitive interest rate. Now, card companies have tightened their standards in the wake of rising default rates and have raised interest rates even on reliable customers. According to www.IndexCreditCards.com, the average rate is now 15.39 percent, the highest in two years.

To maximize your chances of getting the best deal possible, your wife and you should probably apply for individual credit cards. When it comes to credit, separate accounts are usually better, unless one person's credit is so poor (or nonexistent) that he needs a co-sponsor in order to take out a card, as is often the case for college students. But since you are both adults with separate credit reports, you have little to gain from taking out a card jointly, and a potential downside if one person's credit drags down the other person's. (It sounds like you have a strong marriage, but many couples also want to keep their credit accounts separate in case they divorce, in which case jointly held credit cards can become contentious issues.) 

[See also: "Ex-Spouses Can Ruin Each Other's Credit."]

As for whether to go for an unsecured card with a higher interest rate or a secured card with a lower one, that depends entirely on what you are using it for. If you think you might carry a balance, then you should always go for the lowest-interest rate possible. But secured cards require upfront cash deposits, which you may or may not be able to provide. In many ways, secured credit cards aren't credit cards at all, but rather debit cards that give you the extra advantage of rebuilding your credit score.

While your credit score will improve after only a year of making on-time, regular payments, it will take longer—seven to 10 years—for your credit report to fully recover from the stain of bankruptcy. By then, low-interest rate credit cards might have made a comeback.