It is challenging to rebuild your credit when you have bad credit. Some people have bad credit because of their poor decisions, while others are left with troubled credit scores through little fault of their own. For example, bad credit can be a consequence of job loss, divorce, or medical bills.
Understandably, lenders are very hesitant to loan money to those who have bad credit. But getting a loan and paying it back on-time is the best way that you can re-establish your credit. Thankfully there is a way to resolve this paradox.
Using a secured credit card to rebuild your credit
Secured credit cards offer the perfect opportunity to rebuild your credit. These cards work much like any other credit card, except they require the payment of a refundable security deposit before you open an account. Furthermore, these cards are available to nearly all applicants, regardless of your credit score. Most secured card issuers will have to confirm your identity and verify you don’t have any pending bankruptcy proceedings. But if you meet those two requirements, then you should be approved.
Once approved, you will submit a refundable security deposit before your account is opened. Most secured cards require a minimum deposit of $50 to $200, but you can choose to make a larger deposit. Most of the time, the size of the deposit will become your credit limit, so making a larger deposit means you will have more spending power.
But in every other way, a secured card will function just like any other credit card. You will receive a monthly statement, and must make a minimum payment before the due date. If you choose to carry a balance, you will incur interest charges at the standard rate. Other fees are similar such as late fees, foreign transaction fees, and cash advance fees. Most secured cards also have an annual fee, but some don’t.
On the other hand, secured cards can offer many of the features and benefits of other credit cards. For example, you could receive purchase protection and extended warranty coverage. And when traveling, a secured card could offer rental car insurance that allows you to decline the expensive optional insurance offered by rental car companies. There are even some secured cards that offer cash back rewards for your spending, just like unsecured cards.
Tips for using a secured card to rebuild your credit
Having a secured card doesn’t mean you will automatically see your credit score rise. A secured card merely represents an opportunity to improve your credit, but it doesn’t guarantee results. To actually improve your credit, you need to ensure that you make all of your monthly payments on-time. Thankfully, most card issuers will offer a variety of tools to help you meet this goal.
For example, most card issuers offer automatic bill payments from your bank account that ensures you will never make a late payment. Other tools can include email and text alerts when your statement is ready and when your payment is due. Finally, you can also configure automatic payments from your personal bank account.
With a perfect record of on-time payments, and no other new negative information on your credit report, many secured card users are able to qualify for a standard, unsecured card within a year. If your secured card issuer is able to transition you to a standard, unsecured card, then you will automatically receive your security deposit back. If you apply for an unsecured card from a different issuer, then you’ll be able to cancel your secured card and receive a refund of your security deposit.
What to look for in a secured card
Not every credit card issuer offers secured cards, but there are many available. A good secured card will have a low annual fee and offer many of the features and benefits you would expect from any other credit card. And while a secured card could offer you some rewards, the primary reason for having a secured card is to rebuild your credit. Earning rewards can lead some cardholders to overspend and accumulate debt, so it is not always a desirable feature.
However, it is a good idea to get a secured card from a card issuer that also offers unsecured cards and other banking services. A secured card is a tool to help you re-establish your credit, but it can also help you develop a long-term banking relationship with a new company. The stronger your relationship is with your bank, the more likely it will be that you will be approved for new credit cards and other loans in the future.
It is a challenge rebuild your credit, but millions of Americans have done it. By getting a secured card and using it responsibly, you will find your credit score improving faster than you might have ever expected.