When circumstances cause your credit history to suffer, you can take certain steps to lessen the blow.
When I first started in the credit/collections industry I took a job as a bill collector. One of the products we had available to help us collect more was to offer the debtors the chance to open a new line of credit to start improving their credit.
I was surprised by how many people took us up on the offer. Rebuilding credit was a problem for many of them. And when they opened a secured credit card with us, we would move their old debt onto the new card, and REMOVE the negative collection item from their credit report!
That was my first experience with secured credit cards outside of the one we offered at the banks I had worked at previously. But not my last.
As I took classes and attended workshops, I ran into more and more credit repair professionals and organizations that made secured credit cards the cornerstone of their credit “rehab” programs.
Secured Credit Card for the Credit Challenged
Secured credit cards are also known as bad credit credit cards. or even guaranteed approval credit cards. They earned that name because many secured credit card issuers DO NOT CREDIT CHECK.
But as the names suggest, these special credit cards are designed for people who need to improve their credit standing and for those who have yet to establish a credit history.
Why is a security deposit required?
What makes a secured credit card different from standard credit cards is the fact that a security deposit is required to open an account. The security deposit can range from a minimum of $200 to $500 or more, depending on the issuer. We have some banks on our secured credit card page that allow you to add up to $5,000 to your secured credit card!
The security deposit will generally equal your credit limit. By requiring a deposit from the cardholder, the issuer can be confident that in case of missed payments, they won’t have to go thru the expense of hiring a collection agency to collect on the debt.
They just have to take it from the security deposit.
But why even require a security deposit? So many of our clients want to jump right into rebuilding their credit but find the security deposit to be a barrier. So they go with unsecured bad credit credit cards. But there are a few reasons why a secured credit card is a better tool to use if you can save up the security deposit.
3 Reasons Why A Secured Credit Card Is The Best Credit Card For Rebuilding Credit
- Guaranteed Approval – the security deposit makes lenders feel safer in approving these credit cards. Since your credit limit equals your security deposit, they don’t have to worry about the account going into a collection status. If the consumer doesn’t pay, they close the account and take whats owed out of the security deposit.
- Lower interest rates – in recent years we have seen secured credit cards interest rates drop. They also tend to have lower application fees than the unsecured bad credit credit cards
- Larger credit limits – many of the unsecured bad credit cards have credit limits of $300-$500. But with a secured credit card your credit limit can be as high as the bank allows! In some cases, I’ve seen them accept up to $5,000. This is good when lenders look at your credit report and see that someone was willing to lend you $5,000! Secured credit cards look the same on your credit report as the unsecured ones! And showing lenders that you can manage a credit card with a large limit will help you in the future.
Secured Credit Cards Role In Credit Repair
Can you really use a secured credit card to fix bad credit? Yes, indeed! However, it will largely depend on how you use the account and manage your payments.
- Open the account with as large a security deposit as you can afford.
- Make sure you choose a secured credit card that will allow you to add to the security deposit at a later date. This is important. We usually have our clients add more to their credit limits within 6 months of opening the account. This will look like a natural credit limit increase issued by the bank issuer.
- Set your payment up for automatic payment.
After six months, check your credit report to see your progress. After a year or two, your secured credit card issuer may offer to give you an upgrade to an unsecured account. At that point, they will send you BACK your security deposit. We suggest you do one of three things with that check.
- Pay off high-interest debt
- Deposit it to your savings account
- Open up another secured credit card if your credit is still “thin” (meaning very few NEW lines of POSITIVE credit)
