Paying off debt impacts you in many ways – both positive and negative emotions arise during your debt payoff journey. I remember when I was paying off debt I felt both shame and pride, frustration and gratitude, and a host of other emotions, including a lack of freedom. Those all tied back to seeing who was responsible for the situation. It was my actions that led to the debt and it would be my actions that got me out of it.
The credit cards didn’t forcibly remove themselves from my wallet to spend money. I willingly took out the student loans. However, I worked hard and clawed my way out of debt. After becoming debt free, I found myself at a crossroads. I knew I needed to rebuild my credit, as it was in shambles though I had few options. In the end, I turned to a secured credit card to help rebuild my credit.
When You Have Few Options
Getting a new credit card is not always the easiest after paying off a significant amount of consumer debt. This is especially the case if you worked with a debt- counseling agency. Depending on how the credit bureaus report your payoff, your score can take a significant hit. That’s also not to mention the fact that your score might already be too low in the first place. As a result, you will be left with few options.
This is when a secured credit card comes into the picture. Most credit cards are unsecured, which means the issuing bank takes a risk you will be able to repay your charges. With a secured credit card you “secure” the card with a cash deposit at the bank. This protects the bank and provides you access to a card.
You Want to Rebuild Your Credit
A key point behind a secured credit card is to provide the ability to rebuild your credit. If you have a below average credit score, you will face a challenge getting a typical credit card. The best secured credit cards alleviate that problem by providing the opportunity to show you’ve changed your ways.
This is when to utilize the new practices you picked up during debt repayment. You want to use the card each month for already budgeted for purchases. You then want to pay off the card each and every month. Over the course of time, this will begin to improve your credit. This, however, should be viewed as a short-term solution – for a variety of reasons.
Things to Keep in Mind with A Secured Credit Card
A secured credit card serves one main purpose – rebuilding your credit when you have no other options. You may feel conflicted getting a credit card after paying off debt, though if you plan on needing access to credit in the future you want to take that into consideration.
Beyond your personal situation, there are a variety of things to keep in mind when getting a secured credit card. Some of those things are:
- Making sure the issuer reports to all three bureaus (Equifax, Experian and TransUnion) monthly. Some issuers report to only one bureau or irregularly. This will not help your efforts.
- You provide the funds to back or “secure” the card. The issuing bank will hold those funds on deposit.
- You can be turned down for a secured credit card. Each bank has different requirements. Make sure to do your homework before applying to ensure you have what they want.
- You need to make timely payments. If you’re unable to, wait until you can and then get a card. It’s also important to remember not to max the card out, but keep your utilization rate low to optimize your efforts.
- Watch the fees. Some secured credit cards are notorious for their fees. You likely won’t be able to get around all of the fees out there, but you don’t want to pay too many.
Other Types of Secured Financing Options
Credit cards aren’t the only type of financial instruments that extends credit with a collateral. Since secured loans are always protected by a collateral of some sort, you may find that the interest rate on these types of loan tend to be lower.
For example, mortgage rates have historically always been on the lower end. That’s because the banks own your home in case you default. However, secured loans aren’t always just for new financing options. You can take out a secured loan from Avant for an auto loan, HELOC, or even a boat loan.
I know it seems like a secured credit card is something to avoid. That’s not the case; there are good ones available. You want to make an informed decision to put yourself in the best possible position.
A credit card may be the last thing on your mind after paying off debt. That’s understandable. If you need to rebuild your credit, a secured credit card can be a good tool to get you back on track.