Bankrupt individuals and people with terrible credit have a way to obtain a credit card and rebuild their credit history: obtaining a secured credit card. While a secured credit card often reports to the bureaus like a credit card and functions like one, the secured line has very distinct features. Namely, you must "pay" for it.
Identification
The company that issues your secure credit card can report payment history on the account like any other credit card, although some lenders do not report to all the major bureaus. Secure cards have one main difference from a regular credit card: They require a deposit on the credit limit, sometimes several thousand dollars. The creditor holds the deposit in a separate account and only draws on it in case you default on the bill. Purchases draw on the credit limit.
Considerations
Secured cards offer far less risk than a normal credit card, which is backed by nothing, but issuers of secured cards always charge an annual fee and some even an application fee, because only desperate borrowers opt for a secured line. Expect a higher interest rate than an unsecured credit card and more unscrupulous lenders might require you to purchase other services, such as a monthly insurance policy, according to Bankrate.
Benefits
Banks rarely reject applications for a secured credit card because of the safety of the security deposit and the high rates they can charge. Once you show you can handle the responsibility of a secured card by paying every month, the issuer will probably offer to make the account a regular, unsecured card in 12 to 18 months or you will have a sufficiently high score to get one on your own.
Tip
Ask the issuer of a secured line whether or not he reports to all three major credit bureaus -- TransUnion, Experian and Equifax -- some smaller lenders may not report at all, which makes the secured line of little use. Also, shop around for cards that do not charge processing or application fees or any other unnecessary expense.
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