Poor use of credit cards can be harmful to a person’s credit score, and can sometimes lead to situation with no apparent escape. I’m talking about those who have so damaged their credit score that they have difficulty getting car loans, or even booking hotel rooms.
These people live in a financial netherworld where they almost don’t exist simply because they cannot pay for or reserve items with a credit card. And when they try to rebuild their credit, they find all doors closed to them – or worse, they receive barely legal credit card offers looking to exploit them.
This is where secured credit cards come into play.
What is a secured credit card?
People with poor credit history or no credit history can use secured credit cards to rebuild their credit. Here’s how.
A secured credit card is the same as any other credit card except that it is backed by a cash collateral deposit. It is this cash deposit that becomes the credit line for that account. For example, if you commit $500 to the account as collateral, then your secured credit card has a limit of $500. Some banks will increase the limit without requiring an increase in collateral as a means of rewarding responsible use of the card over time.
Where to get a secured credit card.
If you or someone you know is looking to find a secured credit card, You can get a good list of secured credit cards form Bankrate.com. Another place to go is your local credit union. They usually offer lower rates, and sometime waive fees altogether.
Possible Fees.
Speaking of fees, you will definitely want to shop around because some providers charge an application fee and most carry an annual fee. But those fees vary, and why pay more than you have to?
Pitfalls.
As with so many financial products, there are a number of pitfalls to watch out for. There are some offers that are good, and some that are just plain dangerous. Here’s what to look for:
Credit reporting. You’ll want to find an issuer that reports your info to the major credit bureaus. After all, the point of getting a secured credit card is not just to be able to charge your purchases, but to rebuild (or build) your credit history. If the issuer doesn’t report your payments, then you’re not building anything.
Qualifying for an unsecured card. Most issuers will qualify you for an unsecured card after about a year of on-time payments. Make sure any offers you get are no more than a year, or they may be stringing you along.
Length of deposit. Since the card balance is secured by a deposit amount, you’ll want to know how long your deposit will need to be in the account after the card account is closed. The average is a couple of billing cycles. Any more and you could be being taken advantage of.
Baby steps.
A secured credit card can be an essential tool in rebuilding your credit, but it’s important to remember to take it slow. The purpose of any credit card is not to carry a balance, and it is especially true with secured credit cards.
Simply put: the best way to rebuild your credit using secured credit cards is to make many small, regular purchase and pay them off immediately.
This will establish a solid history of responsible credit use.
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