According to a poll conducted by the U.S. Federal Reserve, almost 30% of respondents who had applied for credit said that they had been turned down for credit in the past 12 months and almost 15 percent received less than they asked for. The poll, which was conducted in September 2013 and published in an economic well-being study released in July 2014, indicates that some Americans are still struggling to rebuild credit possibly destroyed during the Great Recession.
If you’re trying to rebuild your credit, there is a way. Secured credit cards allow consumers to make a deposit into the issuing bank for the amount of the credit line and make purchases based on the account balance. They work like a debit card, but also help people needing to build or rebuild a credit history.
“Most secured credit cards report to the major credit bureaus, but be sure you confirm this,” says Beverly Harzog, a credit card expert and author who specializes in secured credit cards. “The point of using a secured card is to either build or rebuild your credit. So if your payment history isn't reported, your credit history and your FICO score won’t improve. If it isn't clear in the fine print, call the issuer and ask.”
The good news is that secured card information isn’t reported differently on your FICO score than data from a non-secured card. As long as you use it wisely, having a credit card can help your score in multiple ways:
- 30% of your FICO score is based on the amount you owe on your credit accounts, compared to the amount of available credit. Keeping your balance 20% less than your cards' credit limits can help your score.
- 10% of your score comes from the types of credit you have and use, such as credit cards, installment loans and your mortgage.
- In time, using credit wisely will help your payment history, which is 35% of your score, and the length of credit history, which is 15% of your score.
Choosing the Best Secured Credit Card
Consumers must always be careful about which secured credit card they applying for. Some cards don’t report to credit bureaus and some have high fees, says Harzog.
“There are excellent choices out there, but keep in mind that these cards target those with bad credit so there will also be predatory lenders to watch out for,” Harzog says. “Some of these will have lots of fees and high interest rates. So read the fine print very carefully. And then read it again.” For more information, see How To Spot A Predatory Lender.
Harzog says you can start your search on the Internet, but it won't provide all the answers. For example, many people believe that because it is secured, you will always be approved. “Getting a secured card from a major issuer, like Capital One or Citi, is more difficult. But there are other cards that are more forgiving of recent bankruptcies and things like that,” Harzog says. “So research is very important to find one that meets your needs and that you can also qualify for. The good news is that credit is loosening up a little and more folks are getting approved these days.”
The other thing to consider is convenience. “Citi offers a very good card, but you have to visit a branch and ask for the application,” Harzog says.
How Much Will It Cost?
Harzog says that most secured cards have a fee ranging from $19 to as high as $75. You should be able to find a decent card with an annual fee in the $20 to $40 range. “Keep in mind that some of the worst secured cards might also charge a monthly maintenance fee,” Harzog says. “This is why it's so important to read the fine print. These extra fees can really add up and you don't want to be surprised by them.”
Harzog advises consumers to always pay off the balance at the end of each month to avoid paying interest. However, if you need to carry a balance over from time to time, you pay extra attention to the interest rate on secured cards, which can range from 8.99% to 29.99% or more.
Top secured credit cards, according to Harzog, include Navy Federal Credit Union nRewards Secured Card, USAA Secured Credit Card and Discover it Secured Credit Card. If you can, avoid First Premier Bank Secured Credit Card, the Verve Credit Card and the The Matrix Card (formerly the Matrix Discover Credit Card), she says, due to high fees. "Credit card agreements change frequently," she cautions on her website. "So my reviews were based on the information that was in effect on the posting date. Be sure you read all the disclosure statements carefully so you’re aware of any changes"
Another good tip is to check online for consumer complaints about any company you're thinking of signing with – and to be wary of any issuer that won't quote the fees and interest rates for its card before trying to capture your name and other information.
The Bottom Line
A secured credit card can go a long way to helping you rebuild your credit. Just be sure to choose the best card that will accept your application. For additional information, check out Secured Credit Cards and Credit Cards For People With Bad Credit.