It's much easier to get bad credit than to fix it, but you've probably already figured that out. Getting new credit is key to rebuilding a bad credit score. However, past credit mistakes can be nearly impossible to overcome, especially when new creditors and lenders are unwilling to give you a second chance. What do you do when you need to re-establish your credit, but can’t get a credit card? You can get a secured credit card.
What Is a Secured Credit Card?
A secured credit card works just like a regular credit card. You swipe your card to make purchases that deduct from your credit limit. You repay the balance with monthly payments or all at once. The major difference with a secured credit card is that you're required to make a deposit against the credit limit on the account. The security deposit is collateral held in case you default on credit card payments.
A secured credit card's credit limit is 50% to 100% of the security deposit you make. For example, if you make a $500 deposit for a secured card, your credit limit will be between $250 and $500.
Be smart in choosing a good secured card. Secured credit cards usually have fees that regular credit cards do not. This includes application fees, processing fees, and annual fees. Beware of cards with high fees because they can greatly reduce your deposit and ultimately, your credit limit. The best-secured credit cards have low fees and good interest rates.
Use Secured Credit to Change Your Credit History
Most bad credit comes as a result of poor payment history. You can demonstrate better payment habits, even when you can’t get credit the traditional way, by getting a secured credit card. You can’t prove a renewed ability to make timely payments until you have a new credit card.
Before you apply for a secured credit card, make sure the creditor reports to at least one of the three major credit bureaus. If not, the card won’t benefit you in terms of re-establishing your credit because future creditors won’t see your good payment history. If the card issuer doesn't report your payments to the major credit bureaus, it won't be included in your credit report or reflected in your credit score.
After you’ve been approved, remember that your purpose for the new secured credit card is to build a positive credit history. That said, don’t use the card to create debt. Instead, use your secured credit card to make small purchases that you can pay in full each month. If you can’t afford to pay for a purchase, don’t charge it.
Transitioning to Unsecured Credit
Many credit card companies convert your secured credit card to an unsecured card after one or two years of timely payments. Even if you can’t convert your secured credit card, you may get approved for an unsecured credit card with another creditor after 12 months of on-time payments.
If you apply for a credit card and get denied, avoid putting in more applications. This makes you look desperate for credit. Instead, continue making timely payments on your secured card and apply again within six months. You'll get a letter from the credit card issuer explaining why you've been denied and you can use this information to decide what you should do next.