A secured credit card can be an excellent tool for building or rebuilding credit. You place a security deposit with the issuer and get a credit card with a credit line that is often equal to the deposit. Because the issuer holds the deposit as collateral in case the balance isn’t repaid, these cards are available even to consumers who have no credit or bad credit.
But what if you can’t even get a secured card? Our reader Dave, who declared bankruptcy and has $75,000 in student loan debt, says he’s been turned down for one. Another reader, Cathy, was turned down for the secured card she tried to get after her bankruptcy. And Bella says she can’t get a secured card, thanks to her ex-boyfriend who stuck her with a cellphone she got in her name for him.
Why can’t these consumers get even a secured credit card?
First, it’s important to understand that every secured card issuer is different and they set their own requirements for approval, which may include a variety of factors. But they will probably require at least three things from applicants:
- an income that can be verified;
- a demonstrated ability to repay the debt;
- funds for the required deposit.
The first two requirements originate with the government. In the case of the first one, the issuer must comply with the U.S. Patriot Act which requires financial institutions to “implement reasonable procedures for verifying customer identities, maintaining detailed customer records, and consulting lists of known or suspected terrorists or terrorist organizations when opening new accounts.”
The second requirement comes out of the Credit CARD Act, which requires card issuers to verify that an applicant for a credit card has the ability to repay the debt. Issuers may handle that requirement differently. For example, to get a Capital One Secured MasterCard (which was named one of the Best Secured Credit Cards in America), the applicant’s monthly income must exceed their monthly rent or mortgage payment by at least $425.
Applicants for First Choice Bank’s primor Secured Visa Gold card simply need to certify that their monthly income exceeds their monthly expenses by $100 or more, says Richard J. Miktus, senior vice president of First Choice Bank. “As long as income outpaces expenses (by that amount),” this factor shouldn’t be a hurdle, he says.
Will Bad Credit Stop You?
A very bad credit score doesn’t necessarily mean you can’t get one of these cards. There is no credit check for the primor card, for example. So credit reports or credit scores are not even a factor.
When a consumer applies for a Capital One credit card of any type, their credit history will be reviewed, but the secured card “is designed for people looking to build or rebuild their credit,” says Capital One spokeswoman Amanda Landers. This may include “people who may have defaulted on a loan or have been declined for a credit card in the last three months,” she wrote in an email. Among other requirements, applicants “must not have a non-discharged bankruptcy that is still unresolved,” she says.
If you are turned down for one of these cards, be sure to read the letter that you receive explaining why your application was rejected. If your credit report or credit score was a factor, by law the lender must tell you and give you the score that was used, along with instructions for ordering a free copy of your credit report from the agency that supplied one to the lender. (This disclosure is in addition to the free annual credit reports you are entitled under federal law so take advantage of it.)
It may make sense to try again, and apply for a secured card with less stringent requirements.
If your problem is lack of income, keep in mind that for the most part issuers allow you to count all income that is available to you to pay the debt, including your spouse’s or parent’s income (if they help support you) or the money you receive from child support, alimony or welfare benefits if you choose to report them.
Rebuilding Credit With Secured Cards
A secured card that reports your payment history to the major credit reporting agencies on a regular basis can help you build a positive credit reference, which in turn can help you build or rebuild credit. (Most report accounts monthly — but double check before you apply).
Besides paying on time, which is the most important credit score factor, try to keep your balances low on your secured card. Credit scoring models compare your credit limits to the balances that appear on your credit reports, and credit and balances that total more than 20%-25% of your available credit can hurt your credit scores. Since credit limits on secured cards are often relatively small, you may need to limit your purchases or pay your balances quickly — before the statement closing date— to keep the balances reported to the credit bureaus as low as possible. Paying your balance in full each month won’t hurt your efforts to build good credit.
You can track your progress building or rebuilding your credit scores using free tools. You can get two of your credit scores for free each month on Credit.com along with an action plan for your credit. For many, a secured card can be one of the easiest ways to build credit.
Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.
More on Credit Cards:
- The Credit.com Credit Card Learning Center
- How Secured Cards Can Help Build Credit
- How to Get a Credit Card With Bad Credit