Getting into credit hot water is much easier than repairing it. That is the unfortunate truth about credit. So how do you get out of the red and back into the green? What is the importance of a good credit score? Thankfully, it’s possible, and getting a secured card is one of the simplest ways to do so.
Getting new credit is crucial to rebuilding a poor credit score. But the catch-22 with credit is it’s near impossible to get a new line of credit once you have a bad score. New creditors and lenders are reluctant to give you another opportunity because they view your loan history as a risk. You may qualify for a line of credit, but with bad credit the interest rates and payment periods could lead you into more hot water. So what do you do? Get a secured credit card.
What is a Secured Credit Card?
A secured credit card functions just like a normal credit card. You swipe your card to make purchases which subtract from your credit limit. You repay the balance with monthly payments or all simultaneously. The significant difference with a secured credit card is that you are expected to make a deposit against the credit limitation on the accounts. The security deposit is collateral, so in the event you default on credit card payments the lender will not be shorted.
The credit limit for a secured card is 50% to 100% of the security deposit you make. For example, if you make a $1000 deposit into a secured card, your credit limit will be between $500 and $1000. The longer you build your reputation, the better your line of credit will be.
Use Secured Credit to Modify Your Credit History
Most poor credit comes as a consequence of bad payment history. You are able to show better payment habits, even if you cannot get credit the traditional manner, by obtaining a secured credit.
When you have been approved, keep in mind your purpose for the new secured credit card is to build a positive credit history, not increasing debt. It’s wise to make small purchases that you can pay off with your secured card. Also keep a low LTV on your card, again showing you are not a risk to creditors.
Many credit card businesses convert your secured credit card to an unsecured card after one or two decades of timely payments. Even if you cannot convert your secured credit card, you might get approved for a unsecured credit card with another creditor after 12 months of on-time payments.
If you apply for a credit card and get denied, avoid placing in more applications. This makes you seem desperate for credit. You’ll find a letter from the credit card issuer describing why you have been denied and you may use this information to determine exactly what you need to do next.
Prior to applying for a secured credit card, be sure that the creditor reports to one of those three large credit bureaus. Otherwise, the card will not help you in terms of re-establishing your credit because future creditors won’t see your payment history. If the card issuer does not report your payments to the major credit agencies, it will not be contained in your credit report or reflected on your credit score.
Be wise when picking an secured card. Secured credit cards normally have fees that regular credit cards don’t. Including application fees, processing fees, and yearly fees. Beware of cards with high fees because they can affect your deposit and your credit limit. The best secured credit cards have low fees and decent rates of interest.
Secured credit cards are one of the easiest ways to help rebuild your credit. It’s important to keep in mind, this is a lenghtly process. Don’t give up and be consistent and you will see results on your credit score before you know it.