When it comes to getting credit, there are two categories of people that may be seen by the lender as a risky borrower. The first is borrowers that have never had credit before and the second is borrowers with a bad credit history. Luckily, there is a way for borrowers in both of these categories to leave their bad credit behind and begin down the road to good credit and all the perks that it offers.
For borrowers that have never had credit before, it is important to prove yourself before you are given any good credit cards, such as a rewards card with a low APR. You will likely just receive denial after denial because you haven’t established a credit history, which can be just as terrible as a bad credit history in the eyes of some lenders. This is where secured credit cards can help you.
Secured credit cards offer are credit cards specifically for unproven borrowers. With this type of card, you will give the bank a security deposit and you will receive a credit card with a spending limit that is equal to your deposit. You will still need to make at least the minimum monthly payments on the card and use it wisely or risk collecting over the limit fees, late fees, and other penalties.
A secured card will be treated just like a normal credit card, except that the bank will keep your deposit if you default. The good news about your deposit is that you will get it back once your have established yourself as a trustworthy borrower with the card issuer. Once this happens you may even receive an increase in your spending limit as a reward for being such a good customer.
A secured card also features an added benefit; you can raise your spending limit by sending in an additional deposit. This is a good way to even out your utilization (how much credit you have available vs. how much available credit you have used), which other lenders may use as approval criteria. It also helps to show that you can be trusted with larger spending limits.
For those with bad credit, a secured credit card helps to show lenders that the past is the past and that the borrower can now use his or her credit responsibly. It helps if the collections, charge-offs, or bankruptcy that is causing the poor credit are at least a year or two in the past. This way, lenders know that the borrower has taken the time to reflect on his or her mistakes, rather than jumping right into credit repair.
Although it is best to wait, it is not always necessary. Most people can get a secured credit card no matter how recent their charge-offs or collection accounts are. This means that you can usually jump on the boat as early as you want to.
Within a year or so of having your secured card you may be able to begin trying for other loans or credit cards, depending on just how bad your poor credit history is. You can even move up with a good repayment history to a non-secured card issued through your lender. The better your credit gets, the higher you can climb the ladder until you get into prime cards with rewards and low APRs.
Although bad credit can seem like a life sentence, there is a light at the end of the tunnel. It all begins by getting that first secured card. Once you begin to dig your way out of this hole, you will start to discover the rewards that better credit offers.