A secured credit card or bad credit card is a proven tool for building or rebuilding a credit record. Many consumers reported that their credit score improved after they used secured cards for six months to a year. But, is a secured card right for you?
If you are relying on credit to finance your family needs and you have a bad credit rating, you will be turned down for any unsecured credit card application. You will need to take steps to repair your credit rating as soon as possible because if you do nothing your credit rating will remain the same for up to seven years — preventing you from obtaining any type of loan.
In such a financial situation a secured card can help you rebuild your credit rating because without a credit card you have no way to prove creditors that you can pay your bills on time and responsibly.
How a Secured Credit Card Works
A secured card works by requiring a first deposit that is equal to your credit limit. For example, if you make an initial deposit of $500, you will have a credit limit of $500. The issuer will then reserve the right to use your deposit against any outstanding balance on the card, if you don’t make payments after a certain amount of time.
As you see, this debit card carries no risk for the issuer. The credit card company can always use your deposit against the balance and you’ll never end up “owing” them anything. This is the main reason this card can be freely issued to people with bad credit. Unfortunately, as with other products for people with bad credit, the costs and fees of these cards are higher than regular credit cards.
Bad credit credit card issuers sometimes charge an application fee. But they all charge an annual fee, which vary dramatically, and in a certain case it can reduce your credit limit even before you use the card. In addition, interest charges of secured credit cards are usually higher than regular, unsecured credit cards.
Steps to Fix Credit with a Secured Credit Card
If you’re considering applying for a secured card as a way to establish or re-establish your credit, make sure you only apply for a credit card from issuers that report transactions to all three major credit bureaus. Because if they don’t the bad credit card won’t be able to help you build a good credit history.
Once you get a debit card, you can repair your credit by using it sparingly but regularly and making sure you make all payments on time without carrying any balance. Make a few purchases and pay for them in full every month. By doing this you will slowly fix your credit and show your creditors that you can be trusted with credit.
Remember, if you don’t take steps, credit bureaus will keep any negative marks on your credit report for 7 years. Unless you are willing to wait that long, take the necessary credit repair steps. Apply for a secured credit card and use it responsibly to improve your credit worthiness. You will get credit again in less than the 7 years waiting period.