Credit cards and bankruptcy are often linked, but this relationship is more complex than it might seem. Credit cards can both hinder and help someone’s financial situation, depending on how they are used.
For instance, reports from earlier this year indicated that credit card debt in the United States has surpassed $1 trillion. Many individuals who file for bankruptcy carry significant credit card debt. Credit cards can lead to overspending, especially when someone has a credit limit that exceeds what they can realistically pay off. This often traps them in a cycle of paying excessively high interest rates, which can ultimately contribute to their need to file for bankruptcy.
The positive side of credit cards
After declaring bankruptcy, a person’s credit score typically drops significantly. Rebuilding that credit score is a crucial step toward achieving a stable financial future. One tool that can assist in this process is a secured credit card. These cards work similarly to traditional credit cards: They allow users to make purchases and require the balance to be paid off monthly. However, the key difference is that a secured credit card is backed by a cash deposit.
The deposit ensures that the lender can recover the balance if the cardholder fails to make payments. Because of this security, lenders are more willing to approve secured credit cards for individuals with low credit scores. Making timely payments on these cards helps to rebuild credit, eventually enabling the cardholder to qualify for traditional credit cards, lines of credit or other loans.
As you can see, credit cards are neither inherently harmful nor universally beneficial in the context of bankruptcy. They can contribute to financial challenges but also provide a pathway to recovery. Those facing financial difficulties should carefully explore their legal options, including bankruptcy, debt consolidation and other tools.