How to Rebuild Your Credit History After Bankruptcy Using Secured Credit Cards
June 1, 2008
By: Amy L. Cooper Arnold
Several months ago Tom, a member of CreditBoards.com, filed for a Chapter 7 Bankruptcy. Now he is in the process of rebuilding his credit history. It's a task that is not easy, but with patient persistence he is seeing progress already. Daily he checks his credit score and is slowly seeing improvement.1 In addition to correcting every mistake, even the smallest ones, on his credit report, he is using a secured credit card.2 This secured card is an important tool in the overall process of building or rebuilding credit.
Who should consider a secured credit card?
- Someone who has no credit history.
- Someone with a damaged credit history.
What is a secured credit card?
Secured cards are credit cards opened with a deposit into a savings account, money market or certificate of deposit. The amount of deposit required varies from card to card, but generally minimum amounts range from $250 - $500. These funds are considered your security and will even earn a little interest since they are being held in a savings account.Your credit limit is determined by the amount you deposit into the savings account. Sometimes the limit will be for the full amount of the deposit; other times it will be a percentage of the total.
It is important to keep in mind that a secured card is a credit card, not a debit card. If full payments are not made each month, then interest is charged on the outstanding balance. And the lending institution uses the security money to pay off the debt only as a last resort. Even though the card is secured, it is still possible to damage credit.
What are the benefits of a secured credit card?
- Establishing credit. If you have never had a credit card, a good first step in establishing credit is applying for a secured credit card. Assistant Professor of Economics at Austin Peay State University in Clarksville, TN, Jerry Plummer says, A secured card is most useful for the person starting out on their credit history, since it says that the person is willing to take the extra step to establish credit.
- Reestablishing credit. If your credit history is damaged, you may only be able to qualify for a secured credit card. Using this secured card appropriately and within the set parameters will help rebuild your credit and qualify you for an unsecured card. If you have had to file for bankruptcy, however, you may not qualify until it has been discharged.
- Preset limit cannot be exceeded. If poor spending habits were part of the cause for bad credit, then a secured credit card will help keep spending in check.
- Useful for transactions that require a credit card. Hotels and car rentals require the use of a credit card. If you don't qualify for an unsecured card but you do for a secured card, then you are still able to make the transaction.
What should I look for or avoid when shopping for a secured credit card?
- Fees. This is the area you will really want to research when shopping for a secured credit card. Some cards will come with fees that run into the hundreds of dollars, eating away much of the credit you secured with the savings account. Professor Plummer says a card with no fee is the best, but a small one-time fee can be okay. Annual fees for attractive secured cards typically range from $20-$35. Be sure to watch out for hidden fees such as registration charges and setup fees.
- Interest Rate. Just because you have no or poor credit doesn't mean you have to settle for the highest interest rate. Interest rates for attractive secured cards should not exceed 19%. Shop around and get the most competitive rate available.
- Read the fine print. Linda Tucker, Director of Education for Consumer Credit Counseling Service for Arkansas and Memphis, TN, stresses the importance of reading the fine print. Doing so will let you know your exact obligations to the issuing company: for example, the grace period, what happens if you don't make a full payment, and what fees are attached if you don't make the full payment. Understanding these details will help make sure you are not further damaging your credit.
- Fraudulent Offers. As with unsecured cards you need to watch out for fraudulent offers.The Federal Trade Commission gives the following advice to protect yourself from credit card fraud:
- Offers of easy credit. No one can guarantee to get you credit. Before deciding whether to give you a credit card, legitimate credit providers examine your credit report.
- A call to a '900' number for a credit card. You pay for calls with a '900' prefix -- and you may never receive a credit card.
- Credit cards offered by "credit repair" companies or "credit clinics." These businesses also may offer to clean up your credit history for a fee. However, you can correct genuine mistakes or outdated information yourself by contacting credit bureaus directly. Remember that only time and good credit habits will restore your credit worthiness.
When will I qualify for an unsecured credit card?
It can take several months to see an improvement in your credit history. It's a good indicator when you start receiving flyers in the mail for unsecured cards that your credit is improving. However, it's a good idea to continue taking things slowly. Using a secured card will help you learn healthy habits so that when you do get an unsecured credit card you remain in control of your spending and credit.
Where can I find a secured credit card?
Most companies don't advertise secured cards. But you can visit our Credit Cards section to find out where and how to apply. Click on the link entitled Cards for Consumers with Limited or No Credit.
- Tom recommends sticking with only one or two cards and keeping spending to a minimum. The goal is to pay the card off each month.
- Tucker emphasizes the importance of paying the amount due each month; otherwise late fees can be charged, interest rates raised, privileges lost, and credit history negatively affected.
- Make sure you are getting a credit card as opposed to a gas card or a department store card.
- Make sure a reputable bank or credit union, even a local one, is issuing the card. And, don't automatically assume a bank is issuing the card.
- Not all issuers report to the three major credit agencies (Experian, Equifax, and TransUnion). It's important to get a card that does report to all three agencies; otherwise you will be wasting your time. Fortunately, secured cards normally report to the credit agencies just like unsecured cards (you should verify this before applying).
- If you have filed for bankruptcy, you will usually need to wait until it has been discharged before qualifying for a secured card. During this time frame, consider applying for a prepaid credit card, such as the Eufora Pre-Paid (stored value) MasterCard (featured card). Prepaid cards work just like regular or secured credit cards. Please be aware, though, that prepaid cards will not help you build or establish credit.
- Get one only if you cannot get credit, since you have no credit record; or if you have poor credit. Plummer says, "Many companies will not even count them as credit, such as automobile F&I (Finance and Insurance) people, although they will not admit it." So, if you don't really need a secured card, you could end up doing more harm than good.
Finally, whatever situation you are in, no credit or poor credit, the best way to build good credit is to set up a budget and then stick with it.