Credit cards and bankruptcy do go together, but not always in the way that you may expect.
What many people assume is that credit cards lead to overspending. If someone has a monthly income of $6,000 and a credit card with a limit of $15,000, for instance, they can theoretically charge much more than they could ever afford to pay off. This triggers interest payments, increases their debt, and that debt can eventually spiral out of control until they have to declare bankruptcy.
However, that doesn’t mean that credit cards are all bad. When used correctly, they can actually be one of the most important tools a person has after filing for bankruptcy.
Secured credit cards
The type of credit card that is used will likely be a bit different. Traditional credit cards are not secured, so they’re just a line of credit that you are expected to pay back when it’s due.
But with a secured credit card, you provide a down payment. You’re only allowed to charge as much as the down payment, so if you fail to make your monthly payments, the credit card company already has that money and simply keeps the down payment instead of returning it to you.
The benefit here is that you can get these credit cards even when you have a low credit score, but paying them off still helps to improve that score. This makes them a useful tool when trying to rebuild your credit after a bankruptcy filing.
Getting a fresh start
If you’re facing financial trouble, bankruptcy can sometimes help you get a fresh financial start. Be sure you know exactly what legal steps to take at this time.