If you’re in or just coming out of a bad credit episode, you may have found that getting new credit is no easy task. This is especially true if you’re trying to get a credit card.
What you typically find is that, if you can get a credit card at all, they come with very high interest rates, and very low credit limits – typically $500.
But you may do better by applying for a secured credit card. They’re not only easier to get, but they can come with higher credit limits and lower interest rates.
What is a Secured Credit Card
On a day-to-day basis, a secured credit card works just like a regular credit card. It can be issued under a Visa or MasterCard logo, you can use it anywhere those cards are accepted, you charge your purchases, make repayments and pay interest.
The primary difference is that the card is secured by a bank account, which you are required to have in order to get the card.
The credit limit is determined by the amount of money in the attached bank account. So for example, a $2,000 bank balance will afford you a $2,000 credit limit on your credit card.
It’s important to understand that you will not have access to the money in the attached bank account. It exists solely as collateral for your credit card.
Banks are willing to make secured credit cards available to people who are deemed to be high credit risks because they can take the money out of the account should you default on your payments.
Why a Secured Credit Card Can Help Rebuild Your Credit
The primary advantage to a secured credit line is that you can be approved if you don’t qualify for a regular credit card. That will not only enable you to have a credit card, but also to begin rebuilding your credit.
The reason for the higher likelihood of approval is the fact that the credit card will be secured.
Most secured credit cards will report your credit experience to the credit bureaus. That will enable you to develop a credit rating that is based on your history with that card.
For this reason, it is absolutely essential that you make sure that the bank will report your credit history.
Once you develop a satisfactory history on a secured credit card, you’ll find it easier to get other types of loans, especially regular credit cards.
But if necessary, you can always apply for another secured credit card, that way you will develop a second credit rating. In no time at all, you should begin seeing substantial improvement in your credit score.
It’s even possible that at some point – based on a good credit history – the bank issuing your secured credit card will drop the collateral requirement, converting the arrangement to a regular unsecured credit card.
The Benefits of a Secured Credit Card Apart from Your Credit Score
There are also a couple of benefits to secured credit cards that have nothing to do with your credit score. One is that you can earn interest on the money that you have in the securing bank account.
That will at least partially offset the interest rate you are paying on the credit line itself.
But there’s another benefit that’s even more significant, and that’s that you will have a credit card available. There are certain times when having a credit card is important. Sometimes a credit card is needed to guarantee a purchase.
But you may also need one to make certain purchases, such as a car rental or purchasing airline tickets.
Other times you may want to use a credit card in order to make sure that you have buyer’s protection in the event that the purchase proves to be defective.
Those are benefits that are not provided by debit cards. The sooner that you can get a credit card after having credit problems, the easier your life will be.
Qualifying for Secured Credit Cards
The process of applying for a secured credit card is similar to what it is for an unsecured credit card. There are various banks that have secured credit cards available.
But one good place to start is with your own bank or credit union. Since they know who you are, there’s a better chance that you will get an approval.
You will need to fill out a credit card application, and the bank will of course run a credit report. However, because the card will be secured with a bank account, the lender is likely to approve your application even if you have bad credit.
You will of course have to make a deposit into a bank account that will act as security for your credit card. Naturally, the larger the deposit, the higher your credit limit will be.
Though the primary purpose of the secured credit card is the need to improve your credit score, you will want to make sure that you have at least $500 or $1,000 to deposit into the bank account.
That will be the minimum amount necessary in order to give the credit card practical value for spending purposes.
This can be a problem for people who are coming out episodes of bad credit. You may have to accumulate the money slowly out of your paycheck, or even consider selling some personal assets.
You should expect to pay a higher than average interest rate, due to your credit impairment. Exactly how much you will pay will depend upon your credit score.
It is also likely that there will be fees connected to the account. This can include an application fee, a processing fee, or even an annual fee to maintain your card.
Once you have a secured credit card, it’s vitally important that you make your required payment each and every month, and make it on time.
Just as is the case with a regular credit card, late payments will be reported to the credit bureaus, and that won’t help your case if you are trying to rebuild your credit.
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Fix Your Bad Credit At The Same Time As You Apply For Your Secured Card
It’s important to understand that obtaining a secured credit card won’t make your bad credit go away.
It will only help you to rebuild your credit by adding positive items on your report. But it won’t erase the bad credit items that already exist on your record.
In addition, if you have bad credit it will also affect your secured credit card. Bad credit means a low credit score, and that translates into higher interest and fees on the card.
For this reason, don’t wait to start the process of repairing your bad credit. Pay your loan accounts on time and pay off past due balances as best you can.
If your creditors will not cooperate with you, or if you have particularly bad credit, get legal help to solve the problem. A competent credit law firm can help you to repair your credit much more quickly and efficiently than you can on your own.