Secured Credit Cards For Bad Credit
If you have applied for a secured credit card because you have bad credit then you’re ahead of the game. You’ve taken a big step to restoring your credit.
We see many borrowers whose credit has taken a beating and they still apply for every credit card they come across. This is a mistake because when a credit report shows too many inquiries without new accounts being opened it’s a red flag for creditors.
Inquiries will drag down your credit scores. Applying for cards intended for people with past financial problems is better:
- You are likely to be approved
- Your payments will be reported each month to the credit bureaus
- Fewer applications and credit checks will help your profile
Secured cards charge higher interest rates and fees than regular credit cards. However, they tend to have comparatively lower rates and fees than unsecured cards for bad credit.
This may seem confusing, but remember that both of these types of accounts are marketed to consumers that are viewed by banks as “high risk” borrowers.
Secured credit cards typically have lower credit limits than cards offered to borrowers with good credit. But making your payments on time and keeping balances low will help your credit improve over time.
If you are patient and consistent, you’ll establish a solid payment history using secured credit cards. Eventually your credit profile will be positive and your scores will soar.
What Is a Secured Credit Card?
Secured credit cards work just like a typical “unsecured” credit card. They allow you to make purchases and withdraw cash wherever Visa and MasterCard are accepted. Most secured card issuers report your monthly payments to the bureaus. This is important for restoring your credit.
The secured card offsets risk by requiring a deposit, usually to cover the credit limit. It will be used to pay any remaining balance if the borrower defaults.
Compare this with the unsecured credit card: It doesn’t require the deposit, but the risk is acceptable for the bank because they charge higher interest rates and fees.
Banks offering secured credit cards may require a deposit that is less than the card’s credit limit. It depends on how the bank views your credit history, it’s tolerance for risk, and even how aggressive its marketing goals are when you happen to apply. Remember, this money is collateral for the credit line. It is refundable when you close the account.
For example, if the bank requires that you place an amount equal to the card’s credit limit, depositing $200 in a savings account with the bank will qualify you for a credit card with a $200 limit. If you default, then the bank will be able to recover its loss with your deposited funds. Read this article to find out more about secured credit cards (it takes you to another site) so you can understand them better for improving your credit profile.
What To Look For In Secured Credit Cards
Secured credit cards carry higher interest rates and fees than typical unsecured accounts. Some require an application fee up front. Paying a fee to apply for the card should be avoided if possible.
Higher interest rates and some fees are justifiable. They are expected with borrowers having higher risk. But being charged a fee to apply for a card doesn’t seem consumer friendly. Even worse, it appears scammy. Most reputable companies don’t charge an upfront fee for their secured card customers.
One benefit to watch for in a secured credit card is the ability to have it converted to a regular unsecured card with low rates. Some companies allow this after 12 months with a good payment history. Others automatically return your deposited funds if you’ve maintained a good payment history and haven’t exceeded your limit.
Most credit card companies will hold your deposit in an account that earns interest. These may be CD savings or regular accounts. When the money securing your card is returned to you (after you’ve established a good payment record), it makes it seem more like a personal savings account.
Compare secured credit card companies by looking at:
- Interest rates they pay on deposited accounts
- APR of various secured cards
- Fees charged for keeping the account open
Of course, you should only consider secured credit cards that report your payments to the credit bureaus. The point of getting a secured account instead of prepaid credit cards is to rebuild your credit as soon as possible. This can only happen when your monthly payments and credit activity are reported.
Secured cards are like “starter” credit accounts for those who have not yet established credit or who need to start over.
Fix Your Poor Credit With a Secured Credit Card
As your payment history builds, you can negotiate better terms on your secured card: Lower interest rates, higher credit limits, reduced fees and a lower deposit for keeping the account active.
You can get several secured accounts. Then leverage your good payments being reported for each of them. After several months of good credit history in your record, you’ll see your scores rise. Then you can apply for regular (unsecured) credit with confidence.
If your credit is bad, get a secured card and improve your profile:
- Get the best secured credit cards you can find
- Leverage your payments into a favorable recent credit history
- Keep using the cards to keep momentum moving forward
- Get auto loans, credit lines and unsecured accounts
It’s worth repeating that following these steps will help you quickly build your credit profile. Be consistent with your payments, then slowly use your improving credit history to get another card. Wash, rinse, and repeat. You can also see the article on this website that goes into more detail explaining exactly how secured credit cards work.