Credit cards are great tools to use to establish or reestablish damaged credit. But what if you can?t qualify for a credit card? Cash secured credit cards are a fantastic stepping stone to greater financial freedom.
There are a number of reasons why you might have difficulty qualifying for a standard credit card: divorce, bankruptcy, poor credit history, no credit history. If you find yourself in a situation where acquisition of a credit card is difficult or impossible, a cash secured credit card will give you the opportunity to build a credit history and posture yourself for standard credit.
With a secured credit card, the balance is prepaid, and the card can be used in all of the same places where a regular credit card is accepted. The big difference is that the charges on a prepaid card are covered by money that you give to your credit vendor before you use your card. The bank that issues your secured credit card will require some money up front, usually between $50 and $500 - the ones that require less may change you more for maintenance of the account, but they give you the opportunity to build a credit history with very little balance down. You can usually spread the initial cash outlay out over time too, by making several initial payments to the bank to bring your balance up to whatever they require.
Even though a prepaid or secured credit card is funded by your own cash it will help immensely in building your credit because the issuing bank reports your usage and payment history to the three big credit bureaus, who really control your credit history and rating information. Secured credit cards are a guaranteed advantage - anyone can get one, and they give you the chance to show that you are willing to make your payments on time. This will have a quick and positive impact on your credit rating as long as you remember to maintain your account and make all payments on time. You also show plan so that you keep the balance owed on the card at an acceptable level, around 40% or less of the maximum allowed.
After you've used and maintained a secured credit card for twelve or more months, and have maintained good payment performance, your credit card vendor will give you the opportunity to convert your prepaid credit card to a standard credit card. Continue maintaining your account and you will build or rebuild a healthy credit history that you can continue to expand on with increasingly flexible credit products. In a future article I will describe how you can build on the credit that you establish with a secured Credit Card.
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