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Secured Credit Cards: A Great Way to Rebuild Credit
Rebuilding credit after bankruptcy, or following a major financial implosion, takes time and energy. While there is merit to using a bankruptcy as a financial black hole, in which you won't spend the money for credit game any more and just never re-enter the loan system after bankruptcy, for many people that is not an option.
One way to improve credit quickly is to use secured charge cards for daily activities, then repay them in full every month. This quickly establishes a payment history, and keep debt load and payments under control. Additionally, these cards are obtained quickly having a minimum of qualification and hassle.
Secured credit cards need to be distinguished from prepaid cards. Prepaid credit cards are cards that are loaded with money, then carried and used as a conventional charge card until the money expires. When that happens, the credit card needs to be recharged, just like a battery. Prepaid credit cards are issued in the name brands, such as Visa and MasterCard, and there's no way to tell a prepaid card from the regular charge card with no trained eye. The major problem with prepaid credit cards is the fact that their use and payments aren't reported to credit bureaus.
For individuals in black hole mode buying on the internet, this really is great. For people trying to rebuild their credit, something better must be used.
Enter secured cards. With secured cards, money is deposited into a checking account and credit is drawn against that deposit. The card use is secured from the deposit amount. Based upon the kind of card, the card might be either fully secured (a dollar for dollar advance from the deposit) a treadmill involving some form of leverage (you deposit X and also the bank agrees to give you X+ around the card). If you default or stop paying, the financial institution has the right to seize your deposit to fulfill the credit card balance. Observe that (1) the credit card issuer doesn't withdraw the cash against the security balance if you don't default and (2) you do not have access or get the security deposit back as the credit card is open.
The secured cards will vary in their interest rates and terms. This is one area where its smart to complete some research and homework. The interest rates vary from 0% to 23.99%. Generally, the lower the eye rate, the higher the annual fee. In addition, the secured card issuer may also charge a use or maintenance fee. Normally, the majority of the card providers charge around 17% for the utilisation of the cards. To offset this, some of the issuers provide interest (at or near market rates) on the security deposit.
The amount of the safety deposit varies as well; it normally starts within the $200 to $500 dollar range and may work upward after that. Also be conscious that extra fees may be required as well as the security deposit, for example to pay off annual fees or maintenance fees.
Finally, remember that using a card issued, even though there's enough money for the security deposit, isn't automatic. Each bank has different terms and restrictions. Again, it pays to shop around and browse the fine print.
