Getting a secured credit card can build or rebuild credit

Negative information on your credit report can destroy your credit. Charge-offs, settlements, and foreclosures can stay on your report for seven years, hurting your chances of getting a low interest rate on any new loans you might get. As your settlements and charge-offs get older, their negative impact on your report shrinks. You might be able to ask the credit bureaus to remove the bad stuff, but this typically happens only when the information is incorrect. There is an alternative way to recover from poor credit other than pleading with the credit bureaus.

It might not seem logical, but opening a new credit account can boost your score. If you’re looking for a way to dig yourself out of a poor credit morass, consider a secured credit card. A secured credit card can be obtained with a deposit account. (A deposit account is an account you have at a bank, from which money can be deposited or withdrawn. Your savings and checking accounts are examples.) To get a secured credit card, you must deposit between 100% and 200% of the amount of credit for which you are asking. This deposit is held in a special savings account, which is controlled by the credit card issuer.

The good news is you don’t have to put up any piece of property, such as your vehicle or house, as collateral. The deposit you make to obtain the card is the actual collateral, so if you default on your secured credit card, the deposit will be used to recompense the creditor.

Using a secured credit card is a great way to rebuild credit because most companies report regularly to the three major credit bureaus. You want to be rewarded for handling money properly, and if the bureaus don’t get the information, then they can’t reward you. Of course, you can’t be using the card to grow a new debt. Start off with small purchases, and make sure you can pay them back in full to gain some positive history. If you maintain good credit on this card for an extended period of time, you could even gain interest on the original deposit.

There are some fees to be aware of when getting a secured credit card. There will be a one-time application fee, as well as a once-a-year annual fee, and a processing fee. If you can make timely payments over the course of a year, your creditor may give you the option of transitioning to an unsecured account, which would eliminate these extra fees.

If you have enough funds to make a deposit, and you have the ability to keep under the credit limit, a secured credit card can counteract with the negative information on your credit report. Having the patience to maintain this type of credit is a great start to rebuilding your credit history.

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