Huffington Post’s financial blog came out this weekend with an article that completely missed the mark on how to build or rebuild your credit using a secured credit card.
The author starts out talking about how credit cards have revolutionized how we live. “Just imagine the pre-credit card days when travel, shopping or going to a restaurant meant carrying around a wallet full of cash or travelers checks.” Not sure where the author is from, but my wallet contains not a single “credit card.” Instead, every account I need access to has a debit card. Like they said in “The Graduate”: “the future is plastic.”
Here’s where the blog post really fails you, though: it intimates that MOST secured credit cards report your payment history to the major credit bureaus in ways that help you rebuild your credit. In fact, they don’t. Worse yet, the biggest criteria the author recommends are 1) comparing the secured card’s fees, 2) the interest rate and 3) the “end game” as he calls it – how long before the credit card become a regular credit card. In industry speak this translates to “when will the creditor have me hooked on credit and minimum payments again, like a good heroin dealer.”
Here’s the REAL scoop on what to look for in a secured credit card if you’re looking to build or rebuild your credit (from an expert whose been in the industry long enough to remember that now-Senator Elizabeth Warren once sat on the National Bankruptcy Review Committee back when Bill Clinton was president and Hillary was first lady):
- Does the card offer a grace period? Meaning do you start paying interest immediately on anything you charge, or only if you don’t pay the balance off in full each month? You want a card with at least a 25-30 day grace period.
- Does the card report your payment history to each of the three major credit bureaus (TransUnion, Equifax and Experian) each month? The answer better be yes.
- Does the card keep your “secured” status confidential? If the credit bureau is reporting that your credit line with them is secured by a deposit, it’s actually doing very little to rebuild your credit. There shouldn’t even be the faintest whiff that your card is secured.
- Does the card let you raise your credit limit by depositing additional money or eventually converting you to an “unsecured” status where they let you charge more than you have on deposit with them – and eventually return your deposit? This is how you build your new credit history in a healthy way.
My free 48 page excerpt from Bounce Back From Bankruptcy, 4th edition contains a whopping 10 pages on “Shopping for the Best Secured Credit Card.” You can download it instantly for more specifics at www.newcreditafterbankruptcy.com. It’s a must-read if you’ve gone through any financial situation and find yourself needing to build or rebuild your credit score.
Bottom Line: No good secured credit card charges outrageous interest or any up front fees. Period. Only a handful of good banks and some credit unions DO offer secured credit cards that meet the above strict criteria. (I actually name names of the good, the bad and the ugly, in the full 268-page Bounce Back From Bankruptcy book.)
No offense to the blogger or the self-proclaimed credit junkie he quoted as his expert, but knowing the ins and outs of secured credit cards is like navigating a mine field. Most times you don’t even know you’ve stepped on an explosive device until you hear the tell-tale click. By then, it’s often too late to save yourself. Don’t let rebuilding your credit be like that. Seek out solid expert advice from financial people who’ve been in the industry for decades and have a good aerial view of the whole financial picture.
The “end game” isn’t getting to the place where you have unlimited access to unsecured credit (again). If that were your true goal, you can get an unsecured credit card from most major banks today regardless of your past credit history. Most of the unsecured credit cards offered to folks with poor credit are horrid little creatures, financially speaking.
The end game is rebuilding your credit and breaking the debt cycle for good. Rebuilding your credit is equal parts having access to the credit you need (for major purchases like a house or car or appliance) AND making sure that more of your money stays in YOUR pocket and not a creditor’s. The goal is getting yourself to a place where every money move you make benefits you and your family and your financial goals both long term and short term.