Secured credit card loans
Whether you have no credit or damaged credit, secured credit cards
are a good tool for building a good credit history. Several months
ago Tom, a member of CreditBoards.com , filed for a Chapter 7 Bankruptcy.
Now he is in the process of rebuilding his credit history. It's a task
that is not easy, but with patient persistence he is seeing progress already.
Daily he checks his credit score and is slowly seeing improvement.
1. In addition to correcting
every mistake, even the smallest ones, on his credit report, he
is using a secured credit card.
2. This secured card is an important tool in the overall process
of building or rebuilding credit.
Who should consider a secured credit card?
Someone who has no credit history.
Someone with a damaged credit history.
What is a secured credit card?
Secured cards are credit cards opened with a deposit into a savings
account, money market or certificate of deposit. The amount of
deposit required varies from card to card, but generally minimum
amounts range from $250 - $500. These funds are considered your
security and will even earn a little interest since they are being
held in a savings account. Your credit limit is determined by
the amount you deposit into the savings account. Sometimes the
limit will be for the full amount of the deposit; other times
it will be a percentage of the total. |
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It is important to keep in mind that a secured card is a credit card,
not a debit card. If full payments are not made each month, then interest
is charged on the outstanding balance. And the lending institution uses
the security money to pay off the debt only as a last resort. Even though
the card is secured, it is still possible to damage credit.
What are the benefits of a secured credit card?
Establishing credit. If you have never had a credit card, a good first
step in establishing good credit is applying for a secured credit card.
Assistant Professor of Economics at Austin Peay State University in Clarksville,
TN, Jerry Plummer says, "A secured card is most useful for the person
starting out on their credit history, since it says that the person is
willing to take the extra step to establish credit."
Reestablishing credit. If your credit history is damaged, you may only
be able to qualify for a secured credit card. Using this secured card
appropriately and within the set parameters will help rebuild your credit
and qualify you for an unsecured card. If you have had to file for bankruptcy,
however, you may not qualify until it has been discharged.
Preset limit cannot be exceeded. If poor spending habits were part
of the cause for bad credit, then a secured credit card will help keep
spending in check.
Useful for transactions that require a credit card. Hotels and car
rentals require the use of a credit card. If you don't qualify for an
unsecured card but you do for a secured card, then you are still able
to make the transaction.
What should I look for or avoid when shopping for a secured credit
card?
Fees. This is the area you will really want to research when shopping
for a secured credit card. Some cards will come with fees that run into
the hundreds of dollars, eating away much of the credit you secured with
the savings account. Professor Plummer says a card with no fee is the
best, but a small one-time fee can be okay. Annual fees for attractive
secured cards typically range from $20-$35. Be sure to watch out for hidden
fees such as "registration charges" and "setup fees." Interest Rate.
Just because you have no or poor credit doesn't mean you have to settle
for the highest interest rate. Interest rates for attractive secured
cards should not exceed 19%. Shop around and get the most competitive
rate available.
Read the fine print. Linda Tucker, Director of Education for Consumer
Credit Counseling Service for Arkansas and Memphis, TN, stresses the
importance of reading the fine print. Doing so will let you know your
exact obligations to the issuing company: for example, the grace period,
what happens if you don't make a full payment, and what fees are attached
if you don't make the full payment. Understanding these details will
help make sure you are not further damaging your credit.
Fraudulent Offers. As with unsecured cards you need to watch out for
fraudulent offers.The Federal Trade Commission gives the following advice
to protect yourself from credit card fraud:
- Offers of easy credit. No one can guarantee to get you credit. Before
deciding whether to give you a credit card, legitimate credit providers
examine your credit report.
- A call to a '900' number for a credit card. You pay for calls with
a '900' prefix -- and you may never receive a credit card.
- Credit cards offered by "credit repair" companies or "credit clinics."
These businesses also may offer to clean up your credit history for
a fee. However, you can correct genuine mistakes or outdated information
yourself by contacting credit bureaus directly. Remember that only
time and good credit habits will restore your creditworthiness.
When will I qualify for an unsecured credit card?
It can take several months to see an improvement in your credit history.
Bankrate says it's a good indicator when you start receiving flyers in
the mail for unsecured cards that your credit is improving. However, it's
a good idea to continue taking things slowly. Using a secured card will
help you learn healthy habits so that when you do get an unsecured credit
card you remain in control of your spending and credit. Where
can I find a secured credit card?
Most companies don't advertise secured cards. But you can visit the Card
Reports section of http://www.CardRatings.com
to find out where and how to apply. Click on the link entitled "Cards
for Consumers with Poor or No Credit".
Other tips
Tom recommends sticking with only one or two cards and keeping spending
to a minimum. The goal is to pay the card off each month.
Tucker emphasizes the importance of paying the amount due each
month; otherwise late fees can be charged, interest rates raised,
privileges lost, and credit history negatively affected. Make
sure you are getting a credit card as opposed to a gas card or
a department store card.
Make sure a reputable bank or credit union, even a local one,
is issuing the card. And, don't automatically assume a bank is
issuing the card.
Not all issuers report to the three major credit agencies (Experian,
Equifax, and TransUnion). It's important to get a card that does
report to all three agencies; otherwise you will be wasting your
time. Fortunately, secured cards normally report to the credit
agencies just like unsecured cards (you should verify this before
applying).
If you have filed for bankruptcy, you may need to wait until
it has been discharged before qualifying for a secured card.
Get one only if you cannot get credit, since you have no credit
record; or if you have poor credit. Plummer says, "Many companies
will not even count them as credit, such as automobile F&I
(Finance and Insurance) people, although they will not admit it."
So, if you don't really need a secured card, you will be doing
more harm than good.
Finally, whatever situation you are in, no credit or poor credit,
the best way to build good credit is to set up a budget and then
stick with it. |
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About the Author
Amy Cooper-Arnold is a staff writer for http://www.CardRatings.com
. Amy has been employed in various accounting-related positions.
She will graduate this December from Austin Peay State University with
a degree in English.
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