Bad Credit? Start Over With a Secured Card
By Eileen AJ Connelly -- AP Personal Finance Writer
NEW YORK (AP) — With a credit score of 789, Lisa Dalton gets offers for platinum cards these days. But in the mid-1990s, her credit was devastated by bankruptcy and divorce.
The Chicago resident was able to turn things around by starting over with a secured credit card, a type that requires an upfront deposit and offers a very low spending limit — typically $500 or less to start.
Such cards lost favor in the free-credit frenzy prior to the recession, as many banks lowered their credit standards and issued regular credit cards to risky consumers. But with the epidemic of mortgage foreclosures and credit card defaults, and a 31 percent jump in personal bankruptcy filings last year, industry watchers expect the popularity of secured cards to grow.
"The whole thing is incredibly humiliating," Dalton said. She recalled that her bankruptcy lawyer told her she'd have to rely on cash for seven years before she would have a chance at getting any new credit. When she learned about secured cards, she said, it offered a ray of hope that she might be able to rebuild her credit sooner.
Dalton had to deposit $200 to get a $250 credit limit. She would use it for a small purchase, then pay it off. As she established a record as a responsible customer, the bank raised the limit on the card, and after a few years, switched her to a traditional, unsecured card.
The card also helped her establish enough of a positive credit history to get a mortgage. She has since opened other credit cards with better terms, and even financed part of her education to become a life and business coach.
Doran's story illustrates the way secured cards are designed to work. "It's like a bike with training wheels," said Martha Doran, a professor at San Diego State University.
Secured cards represent just a small slice of the nearly $1 trillion U.S. credit card market, and they are not without their pitfalls.
Besides the deposit, for instance, some cards charge very high fees, warned John Ulzheimer, president of consumer education for Credit.com. In fact, the first bill with some cards could include fees that eat up most of the credit limit. This could hurt your credit score instead of helping it.
They also often charge high interest rates — 19.9 percent is common — and the low credit limits make it easier to end up getting socked with over-limit charges. What's more, some secured cards begin charging interest right after a purchase, offering no grace period for customers to pay their balance off first.
Researching various offers, however, should enable.
Ulzheimer said consumers should also make sure that any card they apply for reports to the three consumer credit bureaus, or their efforts to rebuilt their credit will be for naught.
"The moral of the story is, these cards have a purpose," he said. "The purpose is to not use these cards forever."
Some in the industry expect increases not only in the number of people seeking such cards, but also in the number of banks that offer them. "They're not going to become very widespread," said Curtis Arnold, founder of CardRatings.com, a credit education site, but it's likely that more banks will offer them.
Among the newest entries into the secured card market is Public Savings Bank, a one-branch bank in Huntington Valley, Pa., which started offering a secured Visa on April 1. "We think that the timing is right for a card like this, because of the economy and the slowdown and the credit contraction," said Executive Vice President Bob Wexler. "There are a lot of people out there who are looking to rebuild their credit." The card has a $79 activation fee, but no other upfront costs, and charges interest at the prime rate plus 7.99 percent — currently 11.24 percent.
While some banks are starting secured programs, though, at least one was shut down.
Joe Ewaskiw, 25, was hoping to build a credit score when he got a secured card through Washington Mutual in June.
"I didn't get sucked into any of the offers in college," said the Los Angeles resident, who now works for an online media company. But avoiding the path most of his peers used to establish credit left him without a credit history, and thus no way to get things like a loan to replace his 11-year-old car.
His credit score rose 50 points in just three months after he opened the WaMu card, which had a $500 limit. Ewaskiw thought he was on the right track.
Then Washington Mutual became the largest bank ever to fail in the U.S.
It was bought by JPMorgan Chase, which ended the secured credit card program in January. Chase does not have any other secured card programs.
Ewaskiw got his deposit back, but when he went to Chase to apply for a regular card, he was turned down. He's not sure how he'll finance the car he needs to buy in the next few months, and said he was discouraged by the experience. "I feel like that entire six months was wasted."
You're not going to get airline miles with a secured credit card, but you also don't have to pay 21 percent interest. There are dozens of offers for secured cards on the market. Here's some tips for making sure you get the best deal you can.
1. Check your credit score first.
While a score in the high 500s or low 600s isn't going to qualify you for a platinum card, you still might be able to get a regular credit card rather than having to pay a deposit for a secured card.
2. Make sure the bank reports to the three major credit bureaus.
If it doesn't, the card won't help you build your credit history or raise your score.
3. Look for a detailed list of all fees you will be charged.
Activation fees, annual fees, program fees, monthly servicing fees and others can add up quickly. A card with a $250 limit that charges $208 up front not only leaves you with little room for spending, it also leaves you with a high balance-to-available-credit ratio, and could hurt your credit score instead of helping it.
4. Don't settle for a sky-high interest rate.
Some banks charge 19.9 percent interest or more for secured cards, but there are cards that charge far less. And some will pay interest on your deposit. Just because you're looking to repair your credit doesn't mean you shouldn't shop around.
5. Make sure your card offers a grace period before interest is charged.
Some secured cards start charging interest right away, but there are plenty that offer the 25-day grace period most regular cards feature.
Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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