Using Secured Credit to Rebuild Damaged Credit

If you’ve ran into financial difficulty that resulted in damaged credit, you might find it hard to obtain new credit. Past credit mistakes can be nearly impossible to move past, 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?

What is a secured credit card?
A secured credit card operates just like a regular credit card. The major difference is that you, the cardholder, are required to make a deposit against the credit limit on the account. This creditor uses the deposit as security in case you default on credit card payments.

The credit limit on a secured credit card is usually 50% to 100% of the deposit you make.

For example, if you make a $500 deposit for a secured card, your credit limit will be between $250 and $500.

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.

Take advantage of secured credit
Most damaged credit is a result of poor payment habits. When you can’t obtain credit the traditional way, secured credit can help you demonstrate your improved payment habits. 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 all three major credit bureaus. If not, the card won’t benefit you in terms of re-establishing your credit because future creditors won’t have a way of seeing the payment history. It won't be included on your credit report or in your credit score.

After you’ve been approved, remember that your purpose for the card is to build a positive credit history. That said, don’t use the card to incur 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 will allow you to convert to an unsecured credit card after one or two years of timely payments. Even if you can’t convert your secured credit card, you can apply for an unsecured credit card with another card company.

Don’t repeatedly apply for credit cards after you’ve had an application denied. This makes you look desperate for credit. Instead, continue making timely payments on your secured card and apply again within six months.

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