Rebuilding your credit history when you have bad credit can be frustrating. You can’t get a credit card without a decent credit score, and conversely, you can’t improve your score without opening new accounts.
The credit card industry markets many cards to people with bad credit, and to people trying to rebuild their credit. Some predatory banks try to take advantage of consumers desperate to obtain credit cards. Because of this, consumers must exercise caution when shopping for a card in the sub-prime market.
If you want to get back on your feet after a credit disaster, keep the following things in mind as you search for a credit card.
Tips for Searching for a Secured Credit Card
1. Stick with a Reputable Bank
Don’t fall prey to prestigious-sounding institutions that offer gold or platinum-colored cards. Many disreputable companies in the credit card industry boast impressive sounding names and credit cards. Instead, apply for a credit card from one of the major banks.
2. Look Out for Fee Traps
Predatory banks bury worrisome details about their credit card offerings in the fine print. Review all the terms and conditions for offers before applying for credit cards. Things to avoid include monthly maintenance fees, high interest rates, application fees, and account set-up fees.
3. Rebuild Your Credit
When you have bad credit, apply for a credit card to restore your credit worthiness. Look for a card that reports your payments to all three major credit bureaus. Once you receive your card, pay your balances in full and on time each month. Failing to make payments on time will negatively impact your credit report.
4. Make Sure You Have a Grace Period
Do not apply for any card that does not offer a grace period. The grace period is the amount of time between your statement closing date and your payment due date. You can avoid paying interest on the card when you pay your entire balance before the due date. Without a grace period, you owe interest on every purchase made, making it difficult to improve your credit score.
5. Avoid Annual Fees
Most secured cards have annual fees, but some companies do not charge annual fees for the first year. Avoid credit cards with hefty annual fees, a sure sign the secured cards are just a predatory bank’s products.
6. Don’t Chase Credit Card Rewards
People with good credit can apply for rewards credit cards. If you do not have good credit, however, and cannot apply for the best cash back rewards cards, consider this a blessing in disguise. Until you can improve your credit history, you don’t need any incentives to spend more money.
7. Consider Credit Card Benefits
Credit cards offer fantastic benefits only available to credit cardholders. By law, you receive protection from fraudulent charges when using a credit card. You can also issue a credit card chargeback if you do not receive the goods or services that you paid for with your card. In addition, a secured card may offer valuable services like rental car insurance.
8. Earn Interest on Your Deposit
Secured card companies typically require that customers deposit funds with the company, in order to activate the cards. Some secured credit cards allow users to accrue interest on their deposits. If you use a secured card, take advantage of this valuable feature.
9. Card Application Acceptance
Making a security deposit does not guarantee acceptance of your secured card application. Bank of America and Wells Fargo require that applicants have not declared bankruptcy for one year, and Wells Fargo also requires that applicants do not have any unsettled liens. Capital One takes into account an applicant’s ability to pay, while Orchard/HSBC approves every application, once they confirm the identity of the applicant. Citibank does not automatically accept applications for secured cards.
Top Secured Credit Cards
If you have just emerged from filing bankruptcy, or if you have poor credit for any other reason, you will not be approved for a standard credit card. As a result, you need to look for secured cards.
To obtain a secured card, you must submit a security deposit, often as little as $50. That amount becomes your credit limit. You still have to make payments on time, or you will incur late fees. If you cannot pay the balance in full each month, you will incur interest. Failing to pay your balance on time results in late fees and penalty interest fees, and negatively impacts your attempts to restore your credit.
Secured cards from major banks have varying deposit amounts, fees and terms:
Cardholders can make security deposits of $300-$10,000. This card has an annual fee of $39, and an annual percentage rate (APR) equal to the Prime Rate plus 16.99%.
This card features a 25-day grace period, and has no application fees or monthly maintenance fees.
Capital One is a reputable credit card company. Applicants can open accounts with a security deposit of $49, $99, or $200, depending on their credit history. This card has a 25-day grace period. After the grace period ends, cardholders must pay interest at an APR equal to 22.9% (V).
Capital One, unlike other secured card issuers, does not charge foreign transaction fees for purchases made outside of the country. This card has a $29 annual fee, and does not charge any other set-up fees or maintenance charges.
Citi is another reputable major bank that offers a secured credit card. Applicants can open accounts with security deposits ranging from $200 to $5,000. This product returns a competitive annual interest rate on your deposit.
This card has an annual fee of $29, and a variable APR equal to the Prime Rate plus 14.99%. Citi claims that secured cardholders may be eligible for an unsecured Citi Platinum card after 18 months.
Wells Fargo is another trustworthy name in banking. The Wells Fargo secured card has a low annual fee of $18, and an APR equal to the Prime Rate plus 15.74%. Applicants can open accounts with security deposits ranging from $300 to $10,000.
This card offers automatic car rental insurance, a feature always included with standard, unsecured credit cards. However, if you have declared bankruptcy within the last twelve months or have any unsettled liens, you will not be eligible for this card.
Orchard’s Secured MasterCard by HSBC offers reasonable terms. The card has a low APR equal to the Prime Rate plus 4.65%, but cardholders should still pay off every month’s balance in full, and on time. If you miss a payment, or make a late payment, Orchard Bank applies a whopping penalty APR of Prime Rate plus 26.24% to the card.
This card has a $200 minimum security deposit, no annual fee for the first year, and a $35 annual fee after the first year.
This is a solid offering from a reputable major bank. This card has a $35 annual fee, and a variable APR equal to the Prime Rate plus 17.74%. U.S. Bank holds your security deposit in an interest-earning savings account.
Applicants can open accounts with security deposits ranging from $300 to $5,000.
U.S. Bank offers cards affiliated with Harley Davidson and offers four other cards co-branded with foreign airlines. In addition to the points and miles they offer, these cards have additional benefits for cardholders. The cards feature auto rental insurance, travel accident insurance, and emergency assistance services.
The Harley-Davidson card offers points in the motorcycle manufacturer’s Genuine Rewards program, and the airline cards offer miles with AeroMexico, LAN, TACA, or Korean Air. These valuable travel benefits make these cards worth considering.
The co-branded secured cards each have a minimum security deposit of $300. The AeroMexico Visa Secured Card has an annual fee of $25 that is waived the first year. The LAN Airlines LANPASS Visa Signature card and the TACA airlines LifeMiles Visa Signature Card each have an annual fee of $75 that is also waived the first year.
The Harley-Davidson Visa Secured Credit Card has an annual fee of $30. The SKYPASS Secured Visa Credit Card, co-branded with Korean Air and SkyTeam partners, has a $50 annual fee.
The market for a secured credit card, or any sub-prime loan, is a hazardous place. Applicants must avoid cards that charge high fees and high interest rates. Obtaining a secured card from a major bank gives you a second chance to rebuild your credit. Seize that opportunity by making all of your payments on time.
Once you have reestablished your credit history, you can apply for standard credit cards. Rebuilding your credit will be a long journey, and choosing the right credit card is merely one of the first steps.
Which secured credit cards do you like best?
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