Secured Credit Cards Help Rebuild Credit

There are many reasons folks run into credit trouble; illness, job loss or divorce among them, and they find themselves with a poor credit rating. Once they work through their short-term financial woes, they look to rebuild their credit rating and one method they can use is with the use of secured credit cards. They work the same as traditional credit cards and no one can tell the difference, and most often, they carry the same penalties as traditional cards.

The way secured credit cards work is that a person has to open an account with the issuing lender and their credit limit is set at the amount being held in the account. Most institutions require a savings account and the money is held as collateral on the amount of the loan made on the credit card. The rules are the same as though it were an unsecured card, in that monthly minimum payments must still be made by the due date.

If a payment is missed the user is still accessed a late fee and, if applicable an over limit fee and any other charges accessed as with traditional credit cards. The difference is that with secured credit cards, after a set number of days being late, the amount due on the card is taken from the savings account. Basically, it is similar to a pre-paid credit card but it comes with the same fees as a credit card account.

Helps Re-Establish Credit History

When a person has an undesirable credit score, lenders are reluctant to offer them unsecured credit. Taking a chance on someone with a poor rating is not in the best interest of credit card companies. By using secured credit cards a person can demonstrate that they are responsible and will pay off their debt as agreed.

However, if the cardholder makes all their payments on time and makes at least the minimum payment required, every month their record is reported to the three major credit bureaus, which will help their credit score edge upwards. Once the score has risen to the level accepted by other credit card companies, they can open an unsecured account and close that associated with their secured credit cards.

Some companies holding the accounts on secured credit cards will allow established users to open an unsecured account through that company, hoping to maintain the savings account the person used to re-establish their credit history. Not only has the person helped re-establish their credit, they now have a savings account in good standing, on their way to financial independence.

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