You’ve heard that you can rebuild your credit record using secured credit accounts. But how do secured credit cards work? It’s important for you to understand the ins and outs of secured cards before applying for them. You can read more about secured credit cards for bad credit on this site along with recommended articles.
Later you’ll navigate around to find the best secured credit card offers. Finding good secured cards is covered in another post. First you must know what to watch out for and what’s required for getting one.
When you apply for a secured credit account you’ll need to place a deposit with the creditor. This is common regardless of whether you’re applying for a loan or a revolving account. Either of these involves placing a deposit with the lender. The creditor wants something of value (usually money) to be deposited in an account for securing the debt. It is collateral.
If you are getting a secured credit card the amount you must deposit usually equals the card’s credit limit. Credit cards are usually offered by banks. Your money is held in an account until some time in the future when the bank returns your deposited money to you.
Some Secured Cards Can Earn You Money
Some of the better banks (offering “good” secured credit cards) will hold your money in a CD savings account. It earns interest. These are usually the same banks that don’t charge application fees or high annual fees to maintain it. Legitimate credit card companies must compete for your business. They don’t charge sky high interest rates.
You might be surprised to learn that secured cards often have reasonable interest rates. They’re even kind of low. They certainly aren’t as low as the rates on rewards cards offered to those with high credit scores. But they’re within reason, not unlike a regular credit card. This is probably because they are safely collateralized by your savings deposit.
Secured credit cards provide the creditor a margin of safety compared with unsecured cards. In fact, unsecured credit cards for bad credit almost always have higher rates than secured cards do.
Looked at in this way, there isn’t anything “bad” about opening a secured credit account. If your money is earning interest then it’s a good thing. And even if the deposit account you open for getting the credit card doesn’t pay interest, you can benefit from having a couple of secured cards in your name.
But don’t expect to earn interest on your deposit; interest bearing accounts for consumers with low credit scores are uncommon. Sometimes they’re seen in promotions for the better secured cards from large financial institutions.
How Can a Secured Credit Card Help You?
Not receiving interest on your deposit isn’t a reason to dismiss a secured card like this. And it doesn’t mean one offer is better than another. Your ruined credit has kept you from being approved. Therefore you’ve missed opportunities taken for granted by those enjoying healthy credit scores.
Maybe your bad credit profile has cost you an apartment you wanted. Landlords won’t rent to people with bad credit. Or you may have had a job offer slip away when the employer ran a credit check to get an idea of your financial habits and sense of responsibility.
As a bank Loan Officer, many otherwise good folks came to me after being denied a business loan. One in particular was a man whose employer filed bankruptcy almost overnight leaving him without a job.
He was eager to start a real estate management business. He had the plans, the ability and the drive. Everything was in place and he was excited. But some hiccups in his recent payment behavior torpedoed his credit report. Along with it went his prospects for the business idea he had. If something similar has happened to you, don’t be hard on yourself. Many of us have been there.
After working with him for 4-5 months using secured cards and paying down balances on his other accounts, his FICO score shot up 47 points. Then he was approved for financing and picked up where he had left off with his goal. A year and a half later, this gentleman proudly showed me how successful he had become with his business.
Like him, you are taking steps now to gain control over your circumstances. This will put a silver lining on your credit report. The reason you’re getting a secured card is to rebuild your profile and raise your scores. Having your good payment history reported to the credit bureaus is more important than features sometimes included as rewards with these cards.
This article in U.S. News and World Report magazine explains how to rebuild credit using secured credit cards. Next time you are asked this question, you’ll know that money you deposit in an account facilitates building your credit record. Now that you have a better understanding of secured credit cards you can plan your strategy for rebuilding your credit profile. In another article I want to share with you some resources for discovering the best secured credit cards.
