Secured Credit Cards for Poor Credit
Poor credit gets in the way of obtaining new credit cards because banks do not want to take a chance on someone with a history of paying slowly or defaulting on bills. You need to use credit cards to reestablish positive credit records, but your options are limited. Secured credit cards are popular with consumers who have past financial problems on their credit reports because these cards are available to almost anyone.
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Definition
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A secured credit card differs from its traditional counterparts by requiring collateral. Unsecured cards have nothing but a formal agreement to back up repayment, which is why banks issue them selectively to people with good credit ratings. Risky borrows must back up their payment promises with money. Secured cards require deposits equivalent to their credit lines to protect banks from losses if the cardholders default, according to Pat Curry of Bankrate.com.
Requirements
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Secured credit cards typically have modest deposit requirements to make them more accessible because people with poor credit often have limited financial resources. Curry advises that you can obtain a secured card with a deposit as low as $300 to $500. This limits your spending ability, since you cannot charge more than your deposit. Your funds are frozen and cannot be withdrawn while you have your secured credit card, but some banks pay you interest on that money.
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Purpose
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Secured credit cards offer convenience, since you can use them like traditional cards to buy things in stores without paying cash or placing on-line orders, as long as you do not exceed your spending limit. They serve another important purpose for people with poor credit, as they rebuild a good credit score when used responsibly. Most banks report your secured card activity to the credit bureaus, where its figured into your credit score just like any other account. Your credit rating improves if you pay the account as agreed and keep your balance below the limit, MSN Money columnist Liz Pulliam Weston explains.
Considerations
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Proper secured card use should earn you a traditional account within 12 to 18 months, according to Pulliam Weston. Some banks automatically convert secured accounts in good standing into regular credit cards after a set time period. Some raise your credit limit over your deposit amount once you prove you can handle your payments. Ask your bank to give you a regular card if it does not voluntarily offer to convert you, once you build up a year or more of on-time payments.
Warning
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Secured credit cards are easier to get than traditional accounts for people with poor credit, but Bankrate.com writer Leslie McFadden warns that approval is not guaranteed because of low profitability. Many banks and credit unions are cutting back on the number of secured accounts they issue so they can focus on regular credit cards, which give them higher profits.
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