Credit cards with good rewards and low interest rates normally require good credit scores of 700 or up. Unfortunately, sometimes we are not too careful about meeting payment deadlines when we are young, which can come back to haunt you later. What can you do? How do you re-establish or rebuild your credit? Good news: A secured credit card might be the solution that you need. Here’s the full scoop on using secured credit cards to build credit.
What is a secured credit card?
A secured credit card uses money you place in a security deposit account as collateral similar to the security deposit for rent payment. You will be issued a low credit line comparable to the size of your security deposit. You are expected to make timely payment towards your purchases. With the security deposit, the lender has established some margin of safety on the borrowed money even if you default. The security deposit is not paid back and cannot be used to offset payments. This differs from a prepaid card where all the money can go to offset payments.
How do secured credit cards work?
- A secured credit card works just like a normal credit card. It normally carries an annual fee and has a higher interest rate. The credit issued is rather low, like $300 to $500. You would need to make frequent payments to clear up the balance for future purchases.
- The collateral might not be returned if you are late or if you default on your payments. Normally, the collateral is returned after a period of responsible payments. It is critical that you make your payments on time since you are working to rebuild your credit history.
- Request for a review after a year. If the review is successful, your collateral will be returned and you can graduate into a regular credit card with lower fees and better benefits.
Good credit scores and responsible credit behavior are important. They help you qualify for lower interest rates on business loans, mortgages, cars, insurance and other big ticket purchases. This translates into big savings.
Never be late on your payment, and make sure you are working hard on rebuilding your credit. It’s never too late to benefit from good credit!
Bonnie Yam, with CFA, CFP, CLU, ChFC, RICP, QPFC, EA, CVA, CEPA accreditations, is Principal of Pension Maxima Investment Advisory, Inc. Bonnie’s services include Retirement Plans, Exit Planning, and Financial Wellness Education - geared to helping business owners maximize retirement savings and attain positive retirement outcome. Pension Maxima also provides Exit Planning strategies for retiring owners. For more information about Pension Maxima, visit their website at: www.pensionmaxima.com or call 914.574.5023.