Secured Credit Cards: A Great Way to Rebuild Credit

March 31, 2012 by  Filed under: Credit 

Rebuilding credit after bankruptcy, or after a major financial implosion, takes time and effort. While there is merit to using a bankruptcy as a financial black hole, in which you refuse to pay the credit game any longer and simply never re-enter the credit system after bankruptcy, for many people that is not an option.

One way to improve credit quickly is to use secured credit cards for daily activities, then pay off the cards in full each month. This quickly establishes a payment history, while keeping debt load and payments under control. In addition, these cards are obtained quickly with a minimum of qualification and hassle.

Secured credit cards need to be distinguished from prepaid credit cards. Prepaid credit cards are cards that are loaded with money, then carried and used as a conventional credit card until the money runs out. When that happens, the card needs to be recharged, like a battery. These cards are issued in the name brands, such as Visa and MasterCard, and there is no way to tell a prepaid card from a regular credit card without a trained eye. The major problem with prepaid credit cards is that their use and payments are not reported to credit bureaus.

For people in black hole mode buying over the internet, this is great. For people trying to rebuild their credit, something better must be used.

Enter secured cards. With secured cards, money is deposited into a savings account and credit is drawn against that deposit. The card use is secured against the deposit amount. Depending upon the type of card, the card may be either fully secured (a dollar for dollar advance against the deposit) or one involving some type of leverage (you deposit X and the bank agrees to give you X+ on the card). If you default or stop making payments, the bank has the right to seize your deposit to satisfy the card balance. Note that (1) the card issuer does not withdraw the money against the security balance unless you default and (2) you don’t have access or get the security deposit back while the credit card is open.

The secured cards are different in their interest rates and terms. This is one area where it pays to do some research and homework. The interest rates vary from 0% to 23.99%. Generally, the lower the interest rate, the higher the annual fee. In addition, the secured card issuer may also charge a use or maintenance fee. Normally, most of the card issuers charge around 17% for the use of the cards. To offset this, some of the issuers do offer interest (at or near market rates) on the security deposit.

The amount of the security deposit varies as well; it normally starts in the $200 to $500 dollar range and can work upward from there. Also be aware that extra fees may be required in addition to the security deposit, for example to pay off annual fees or maintenance fees.

Finally, be aware that having a card issued, even though there is enough money for the security deposit, is not automatic. Each bank has different terms and restrictions. Again, it pays to shop around and read the fine print.

Craig Andrews, JD writes on how legal issues affect everyday life. His emphasis is on identity theft, credit, collections and bankruptcy. He also writes on elder abuse issues.

His website is http://www.bklifeboat.com

Article Source:
http://EzineArticles.com/?expert=Craig_Andrews,_J.D.

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