A history of rough financial times on your credit report can make it more difficult to obtain financing but it bad credit is not a life sentence. Even those with the most significant credit issues such as a bankruptcy or foreclosure, do have options. Enter the secured credit card.
A secured credit card is a product specifically designed to help consumers who have had some challenges in the past. Now banks are in business to make a profit so secured credit cards have features designed to protect the bank from losses. The key feature that protects the bank with a secured credit card is the security deposit. Most banks require anywhere from $50-300 security deposit. Typically the bank will issue you a credit card with a line of credit either in the amount of your security deposit or in some cases they may give you a larger line which would only be partially covered by your security deposit. The security deposit will be held at the bank for safe-keeping while the card is open. In the event that the credit card goes default from non-payment, the bank would use the funds from the security deposit to offset the loss from non-payment. If you do decide to close the account and your balance is zero the security deposit would be refunded to you.
First and foremost, if you are trying to re-establish your willingness and ability to repay, you have to start somewhere. Secured cards are great because the credit qualification requirements are generally well below a typical unsecured credit card. Now there are unsecured credit cards designed for consumers with poor credit that don’t require a security deposit, but these card invariably have non-refundable upfront and annual fees to offset the credit risk to the bank.
Secured credit cards are really designed for consumers with a history of bad credit but they may also come in handy if you are new to credit.
Do your research. You want to select a secured card from a reputable company. Most of the top credit card issuers in the US offer secured credit cards, including: Capital One, Citi and Discover.
After you receive your card, you are going to want to use the card regularly to develop payment history but you don’t want to run risk of developing a balance that you won’t be able to repay. We generally recommend you diligently make at least one small transaction every month with your card and pay the balance in full well in advance of your payment due date. You may have heard that you should carry a balance on your credit card month-over-month but this doesn’t help you to build credit history; in fact, carrying a credit card balance hurts your credit utilization which, in turn, hurts your credit score so is to be avoided. Optimally, you’ll want to keep your credit utilization percentage below 10% of your credit line. So if you are issued a secured card with a $200 credit limit, you can only charge up to $20 to the card in a given month.
You’ll want to review the terms of the card carefully. Be on the lookout for an annual fee. Typically, you’ll want to avoid secured credit cards that have an annual fee as there are probably no annual fee options out there. Also, take a look at the security deposit funding requirements. Often secured credit cards require that you have a bank or checking account to fund your security deposit. If you don’t have a banking relationship, you may want to make that your first step.
Although you don’t typically need good credit you do typically need to have some sort of a bank account such as a checking account. The card issuer will use your bank account to fund the security deposit. A past history of credit issues is typically okay but if you have an serious recent issues that are unresolved such as outstanding collection accounts the bank may want to pass despite the security deposit. You’ll also need to have a steady source of income or employment.
In general, you’ll want to develop a consistent payment pattern of at least 6 months to a year before you apply for an unsecured credit card.