Credit > Establishing Better Credit(2) Obtain a secured credit card If your credit has been damaged and you have been turned down for a conventional credit, you will probably be able to obtain a secured card. Secured credit cards are usually available to debtors with even the worst credit. The idea behind a secured card is very similar to that of a secured loan, but it does not involve personal property. Instead of offering personal property as collateral, you will be required to forward money to the secured card issuer, who will place the money in a "deposit account" which earns interest. In return they will give you a credit line that equals or is a percentage of the amount that you deposited (some creditors will issue a credit line larger than the deposit.) The creditor retains a security interest in the funds that you deposited and on the interest that the deposit earns and you will have to give up all control of the funds that you initially deposit. In most cases, a return of your deposit will only occur when your account has been paid in full and your, inactive, card has been returned to the issuer. Before acquiring a secured card, you should make sure that the issuer would report your payment history to the credit bureau, just like any other credit card would. You should also make sure that the card is not reported to the credit bureau as "secured" by the credit issuer. Secured credit cards offer relatively low credit lines (usually from $200 to $500.) They should be used for the purpose of rebuilding credit and there should be no need for high credit limits that allow discretionary spending to grow out of control. Typically there is an annual membership fee and the interest rates are high (18-20%). Secured cards offer creditors and debtors a win-win situation if the debtor uses them correctly. There is minimal risk to the lender because if you default on your obligation to repay the money that they loaned to you, they can take your security deposit, guaranteeing them a return on the principal amount that they loaned you. Additionally, they will have made money on any interest and fees that you paid prior to defaulting on your obligation. You get to have the convenience of a credit card while you are rebuilding your credit and learning new budgeting skills. |
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