Credit Card Debt Management

Did you know there are different types of credit cards? Secured credit cards are quite a bit different from unsecured credit cards. They are also sometimes the only option for those with tarnished credit or no credit at all.

Secured credit cards have an annual fee, whereas such is not always the case with unsecured cards. The biggest difference, however, lies in the fact that secured credit cards are backed up with “collateral” — property that can be confiscated if the loan goes into default. Essentially, a secured credit card is typically issued by a bank, with which a cash deposit must be made as collateral. The credit card is then set up with a limit typically equal to the amount of cash deposited.

In the event that cardholders quit paying their bill, the bank keeps the deposit. Once deposited, the money attached to a secured credit card can usually not be tampered with as long as the credit card is open and active. The money can, however, draw interest, which is a good feature to look for in a secured credit card offer.

Another important feature to look for is whether the card issuer reports to all three credit bureaus. Even though a secured credit card functions differently from an unsecured card, it still impacts your credit report and credit score the same way. Responsible credit card management reaps big rewards, while irresponsible management dings up the credit history. The good news is that secured credit cards can provide a direct path, over time, to easier approval for unsecured credit cards with no annual fee. So if your credit is dinged up from bad choices made in the past, or maybe you’ve just weathered a divorce or bankruptcy, you may be a prime candidate for a secured credit card. And with a little patience and perseverance, you can rebuild your good credit.

So you’re living paycheck to paycheck and you really need a credit card to help with all those little emergencies that can arise. But maybe your credit record got into a bit of trouble in the past and now you’re left adrift in a sea of helplessness. There are people out there who want to help you get back on your feet — people other than Joe the Used Car Salesman.

The first thing you need to embrace is a change of thinking. Emergency funds are the absolute best answer for emergencies. Credit cards are only for emergencies when there is no emergency funds and small purchases, like gas, that you pay off in full at the end of each month. While credit cards can get you into trouble if you don’t change your spending habits, it is true that the lack of a credit card to build up your credit rating can make it nearly impossible to buy a car, a house, get a decent rate on car insurance, and even, in some cases, rent an apartment.

So how do you get the almighty credit card if you don’t have any credit? Start with a retail store credit card, which is absolutely ridiculous because this is usually far from “necessary purchases” and it becomes very easy to get carried away. It’s the psychology of shopping — it is easier to buy more with painless spending (meaning you don’t see money leaving your hand, so there’s no emotion involved). Nevertheless, retail stores are, unfortunately, the most lenient with their credit policies. These are usually low-limit, high-interest cards that can serve as the foundation for the future of your credit.

Talk to your bank. Of course, banks are not the most generous of all lenders right now. They made too many stupid loans to too many high-risk borrowers and now they are reaping their rewards, which they are passing on to you, the consumer. You want credit at the bank? The waiting line is growing as fast as the denials.

Get a secured card. This will require you to put money into an account, which you can then access with your credit. It’s kind of like using a gift card that you bought for yourself, except it boosts your credit rating.

So those are some ideas to get you started on the road to a bigger and better credit rating. It can seem like a financial juggling act at times, but building up your credit is a worthwhile task in our credit-centered society.

The American Chronicle had a fabulous article recently about “The Six Questions Lenders Will Ask You After Your Bankruptcy.” The largely first-person article by Stephen Snyder, founder and president of the After Bankruptcy Foundation, offers sound, common sense advice for those who have undergone the financial nightmare that is bankruptcy. Don’t forget, however — nightmare as it is, bankruptcy is not the end of the world. There is life after bankruptcy, and here are a few of the highlights to help you along:

Pay on time, especially after bankruptcy.

Establish new credit. These are typically going to be high-interest loans and lines of credit. Retail credit cards are a good way to get started. They’re not terribly picky about credit scores, but they are higher interest. Whatever new credit you choose to get back on your feet, use it responsibly or it will be all for nothing.

Know your credit score. Knowing your FICO score is essential to gaining a slight upper hand when going in to talk to a lender. Knowledge truly is power.