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.

If your credit has taken a hit, or you haven’t established any credit at all, a secured credit card may be a good solution for rebuilding your good name. It’s a card with a credit limit determined by the amount of your own cash that you load onto it, and the credit limit could possibly eventually be raised by the card issuer by a certain percentage. But carefully consider your options before choosing a secure credit card to ensure you get the right deal for your situation.

Is there an application fee?

You should not have to pay a fee just for applying for the card. However, chances are good that you will have to pay an annual fee, as is standard with secured credit cards. So make sure your card’s annual fee will be reasonable. It truly pays to read the fine print so your card balance isn’t eaten up by fees before you can ever even use it.

Is an insurance policy required?

Just like you shouldn’t have to pay an application fee, you shouldn’t have to purchase payment insurance. Also known as a payment protection plan, this feature covers your payments in the event of death or injury. It’s supposed to be optional, not mandatory, so look for a secured credit card with as few strings attached as possible.

Which credit bureaus does the company report to?

The point of a secured credit card is obviously to build a good credit rating. The only way that can happen is if the credit bureaus are attuned to your progress and how you manage your payments and spending. Make sure your secured credit card issuer will be reporting your payment history to all three credit bureaus, Equifax, TransUnion and Experian. This is important because you never know which credit bureau a lender will use to determine your loan eligibility. Then, the ball is in your court. Buy a few items and pay off the balance in full each month. This will reflect well on your self-control and fiscal responsibility, and enable you to move on to unsecured credit cards with lower interest rates and no annual fee.

Bad credit is no fun - that goes without saying. But don’t make the mistake of assuming your credit is improving, based on the number of credit card offers you receive in the mail on any given day.

My really bad-credit friend said this once: “I guess my credit score must be improving because credit cards are starting to send me offers again. I get them all the time.” No, in this case that probably means my friend’s really, really bad credit had improved to just bad credit status. After all, credit card companies have also been known to inadvertently offer credit to a 13-month-old.

All the offers being sent to my friend were secured credit cards that switched to unsecured over time (with good customer history). Not that there’s anything wrong with that! In fact, that may be one of the best ways to improve bad credit. It essentially means your card has a credit limit equal only to the amount of the deposit you put in the bank that issues the card to you. It works much like a reloadable prepaid debit card, the main difference being that a secured credit card can improve (or hurt) your credit score and a debit card really has no such effect.

Unsecured credit cards, on the other hand, are a whole different ball of wax. They are the ones everybody else gets, but customers with bad credit typically get much higher interest rates and annual fees attached. Mr. Credit Card provided a very thorough answer to a reader question along these lines, along with a list of bad credit offers. This fine Banks.com article will also teach you more about credit card offers for those with bad credit.

Whatever “bad credit” improvement method you choose, examine what is often the root problem - controlling monthly spending. That will help you have enough money to pay your credit card bill on time, one of the strongest determining factors in whether a credit card will help or hurt your credit rating. The other thing to remember: check your FICO score on your own, and don’t assume that your credit score is climbing because credit card companies suddenly have renewed faith in you as a customer.