For those with bad credit or no credit, getting approved for a credit card can be a daunting task. In some ways, no credit can be worse than bad credit–someone with bad credit has a visible history that can be examined and explained. Similarly, those with bad credit can turn to credit restorers to help get their credit back on track.
A person with no credit is typically looked at by banks as a financial ghost with no history whatsoever. This can lead to people being declined for a credit card or loan, even if they’ve never missed a payment on other bills like utilities and car insurance.
Thankfully, you can get a credit card with bad credit or no credit. This is because banks have come up with a rather simple solution: the secured credit card.
What Is Collateral?
Before we dive into secured cards, we need to quickly understand what collateral is. Collateral is personal property that is put up as a guarantee that a loan will be repaid. If the loan cannot be repaid, the financial institution will seize the collateral and sell it to recover the money that is owed.
A small business looking to expand with a bank loan might put up the company vehicles or machinery as collateral. A clause will be written into the loan contract that stipulates under what circumstances the bank will seize the property, and as long as the payments are made on time, there is no worry for the borrower.
How Does Collateral Work for Credit Cards?
In the case of a secured credit card, the collateral is cash in a bank account. This means that you’ll be required to make a deposit into a secured account that you won’t be able to withdraw from. The amount that must be deposited is often the same as your credit limit–if your credit limit is $1,000, you’ll be required to deposit $1,000 into the secured account.
This is different from a standard bank account because the status of a standard account isn’t going to be reported to the credit bureaus. Also, even though your money is tied up as collateral, it won’t be touched when you make a purchase on the credit card. It will remain in the secured account.
You’ll be required to make your monthly payments, just as you would with a regular card, from an account separate from the secured account. Failure to pay the monthly payment means that the bank will instead deduct the amount from your secured account so the bank does not lose money. If this happens, the bank will report negatively to the credit bureaus.
Secured credit cards exist as a vehicle for improving one’s credit score and profile, or, in the case of having no credit, to begin reporting an account history to the credit bureaus. By making payments on time, your overall credit score and profile will improve, eventually allowing you to obtain larger unsecured loans and credit cards.
Getting the Help You Need
Another way to improve your credit score is by working with a qualified and licensed credit repair company like The Phenix Group. Our financial experts can help make sense of your credit report, provide counseling on best practices, assist with credit fraud alerts, and dispute any inaccuracies that may appear on your credit report!