As the nation gradually recovers from the financial earthquake of 2009, many people find themselves trying to rebuild their shattered financial identities, secured credit cards can really help. Although it is often no fault of their own, late payments, closed accounts, foreclosures, and bankruptcies have marred the record of many honest and hard-working citizens. Secured credit cards are frequently the first step in regaining some semblance of financial health and renewed creditworthiness.
How secured credit cards work
The way these systems operate is fairly simple. A sum of money is deposited in a bank account, and the funds are blocked from being withdrawn without first closing the account. With these funds acting as insurance against default, a credit card is issued with a limit equivalent to that of the bank deposit.
These secured cards are indistinguishable from any other credit card. Payments made to the account are reported to the major credit agencies, just like any other credit card payment. Over time, these payments rebuild the standing of people with otherwise damaged credit records.
Rebuild credit with a secured credit card
In addition, after a few payments are made on time, other companies that cater to the startup or rebuilding credit market will step forward with offers for more cards. These new cards need to offer some additional carrot for the customers to sign up. The usual method is to offer an unsecured card, but one that comes with a hefty upfront activation cost that is approximately equivalent to a 50% deposit against the credit line. This shows up as an initial charge on the first statement and can be paid off as any other charge made against the card.
Keep in mind that a secured credit card is not the same thing as a prepaid debit card or debit cards issued in conjunction with a checking account. Neither of those will help rebuild bad credit, since they are not credit cards. The difference may seem technical, but it is a very real one. On the one hand, debit cards immediately remove money from your account, while secured credit cards theoretically draw against your credit line but leave the deposit intact at all times.
The pitfalls of a secured credit card
Like all other forms of credit, the key to these second chance opportunities is to keep payments current at all costs. Many secured credit cards have brutal late fees, as do all other credit cards for that matter. It is not the loss of money that hurts; however, it is the fact that a late payment is recorded on your record.
Send a payment in by wire transfer or overnight mail if necessary, but get it there on time every time. A year’s worth of ontime payments does wonders for credit ratings. The cost of these extraordinary payments may be high, but they are less than the hit imposed by a late payment fee and do no damage to the credit rating.
Use your secured credit cards wisely
Whether you are just starting out in a world that has fewer credit opportunities than before, or are putting your life back together, secured credit cards are an important financial tool that can point the way towards a hopeful future.
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