Secured Credit Cards

Many people who have gone through financial setbacks have struggled to rebuild their credit. The reason is simple: lenders are reluctant to extend credit to consumers with low credit scores, outstanding collections, past bankruptcies, etc. So what’s the best option for a consumer with a low credit score due to past credit problems? Apply for a SECURED CREDIT CARD! Secured credit cards are, hands down, the BEST WAY to re-establish credit and restore a good credit score. Most consumers have never heard of secured credit cards mainly because few banks have a vested interest in promoting them and many bankers simply don’t understand the fundamentals of how credit scoring works. Furthermore, unscrupulous credit repair companies rarely take the time to counsel their clients on how to re-establish credit and mainly focus on how to remove old derogatory items from their credit files. Although cleaning up old collections and charge-offs can indeed help raise the score, failure to RE-ESTABLISH new credit will keep the score lagging behind for years.

In other words, simply removing and/or paying old collections and charge-offs will not magically make the credit score raise high enough to qualify for a mortgage and/or many other types of consumer loans. New credit must be established in order to raise the credit score. Many people make the mistake of financing cars they do not need at ridiculously high interest rates in order to achieve this, when simply getting a secured credit card with as little as a $300 limit will do the trick over time.

How is a secured credit card different from a regular credit card? A secured credit card is, well, SECURED by a savings deposit equal to the amount of the credit limit and is held by the bank as collateral for repayment. In other words, give the bank $300 and they issue a credit card with a $300 limit. If the cardholder runs up a $300 balance on the credit card and defaults, the bank keeps the $300. It’s basically a no-lose situation for the bank, which is why practically anyone can get a secured card, regardless of credit history. If the cardholder keeps the account in good standing, the $300 remains in a savings account, and even earns interest. Typcially, most banks will release the security deposit back to the cardholder once they’ve proven their creditworthiness by making timely payments on the account for a period of 12-24 months. They will even, in many cases, raise the credit limit once this good payment history has been established. It’s important to note that the $300 is not a “fee”, it’s a “deposit” and it still belongs to the cardholder. The only way this money can be lost is by defaulting on the credit card per the cardholder agreement.

But what happens if an emergency arises and you need the $300? The bank will return the security deposit as long as the full balance on the card is paid in full and the cardholder agrees to close the account. The only way to lose the money is by defaulting on the credit card balance.

Underwriting guidelines for mortgages have tightened up significantly in recent months, and may continue to contract for many more months, even years. It’s NEVER been more important to have a good credit score when applying for a mortgage. FHA and Fannie Mae require a minimum of three tradelines that are open and have been active within the last twelve months in order to meet the minimum standards to qualify for a mortgage. In the past, it was relatively easy to use non-traditional credit references, such as letters of credit from utility companies, etc, to meet this requirement. But now many lenders are either imposing much higher interest rates for using this non-traditional method, or have stopped allowing this altogether. So it’s never been more important to build up a good traditional credit profile prior to applying for a mortgage. One nice feature about a secured credit card is the account stays open indefinitely unless either the cardholder or credit card company closes the account. Installment accounts, such as personal loans, automatically close when the term of the loan matures. In other words, once a 12 month installment loan is paid off, the account closes and this no longer counts as an open and active account, which reduces the long term impact on the credit score. (For more information on this, read about HOW CREDIT SCORING WORKS.)

So in conclusion, a secured credit card is a wonderful tool to increase both credit score and the overall likelihood of qualifying for a mortgage. As a loan officer, i can not guarantee this will result in a loan approval, but i CAN guarantee that not taking action to re-establish credit will significantly hinder the chances of qualifying in the future. The BEST way to re-establish credit is through secured credit cards. This, combined with managing credit, will make a huge difference in the shortest amount of time possible.