DIY Credit Repair: Secured Cards
Using secured credit cards is one of the best ways available to build
credit. In fact, if you
have marginal or extremely poor credit it may be the only safe way to build
credit. One of
the things you don't want to do on your way up, or back to good credit, is
to apply for credit
you may not get. As it's been mentioned elsewhere in this manual, a credit
turndown
results in an inquiry which subtracts 2 to 3 points from your credit score;
depending on the
credit bureau. But, almost anyone can qualify for a secured card. For most
secured VISA
and MasterCards, the basic qualifications are to be at least 18 years of
age, have a valid
social security number, a checking account, and income of at least $1,000
per month.
How secured cards actually work
Banks and credit card companies which issue secured credit cards are usually
issuing
VISA cards and MasterCards. These cards are issued on the basis of you're
opening a
savings account at the issuing bank. The fact that you're opening a savings
account
when you apply for a secured card may not be obvious to you. But, in
reality, that's exactly
what you're doing, and the bank is holding this account as collateral for a
line of credit
which is equal to, or slightly higher than the amount of your deposit or
balance.
Opening minimum deposits can range from $100 to $1,000 depending on the bank, and many will offer the option that you may increase your credit line by increasing your deposit after you open the account. Even better, with some secured card offers, the bank will periodically review your payment history (usually every three-to-six months), and will reward you by increasing or raising your credit line if you've been handling the account responsibly. If this happens, it's a great sign you're credit is improving overall. This kind of good credit-building will usually result in "preapproved" credit card offers showing up in your mailbox.
The best secured credit cards
Using secured credit cards to build credit, however, can be costly if you
don't select the
right ones. The problem with many highly-promoted secured cards are that
they're laden
with "junk" fees. Let's say you're considering opening a secured card. If
you don't read the
fine print on some secured card offers, you're going to find that on a $300
minimum
deposit, initially you'll have an application fee, a processing fee, an
administration fee,
a membership fee, and so on. With some card offers, the bank's limitations
on charging
fees seems to be only bound by their ability to think of names for their
fees. So, of that
$300 deposit, you might find on opening the account that only about
one-third or less, of your
deposit is available to you as credit. The other percentage of your
deposit has been
eaten up by the issuing bank's fees. And "bingo!", you'll also find that
even before you've
whipped out that new card for your first purchase, you're already in "debt"
because those
fees have been added to your expended balance... it's money you have to pay
back to
yourself. The good news is most of these fees "shock" happens only when you first open
and activate
your account. The bad news is that you selected the wrong card and have paid
dearly for it when you didn't have to.
Suggested secured cards
If you are not happy with your local bank's secured card, we suggest the
Wells Fargo Secured Visa® Credit Card, a distinction is
granted based on the availability with an absence of many of these fees.
The most common mistake made with secured credit cards
The most common mistake consumers make with secured credit cards while
trying
to establish or build good credit is to "max" out the card, and then make
only the
minimum required payment. By "maxing" out a card, it's meant that all or
nearly all of
the available credit amount is used.
What surprises many consumers who are using secured cards to build credit, is that making only minimum payments when the card has been maxed out... even on time, month after month, doesn't help their credit. In fact, using a card this way actually hurts your credit further!
The best and proper way to use a secured card
Most consumers who open a secured credit card account will probably open one
with a
$300 to $500 deposit. If you're really tight on cash, don't expect to "live
off" this deposit,
but rather, consider it an investment. Figure only half of this money is
ever available to
you. For example, let's say you open a secured card with a $300 deposit. You
never want
your billing or statement cycle on the card to end with you're owing more
than $150, or
half of your available credit. Ideally or optimally, to use the card to
maximum advantage
for credit building, you should pay the balance down to zero every month,
and not carry a
balance at all. This is the best, most effective, and fastest way to build
credit using a
secured credit card.
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Disclaimer
Credit repair is not an exact science as individuals will have different credit issues to deal with, and may sustain unique responses from the credit bureaus. We are providing this resource as a free tool, and cannot guarantee credit repair based on individual situations. Use of this manual, like any resource at Finance Globe is subject to our website terms of use.