06-28One of the more common methods used to begin rebuilding credit reports and credit scores after a bankruptcy is the secured credit card strategy.

Secured credit cards offer credit building opportunities primarily because they are easy to procure, even for people with credit problems.

How Secured Credit Cards Work

Secured credit cards offer a low risk way for credit card issuers to extend credit to consumers with damaged credit histories. A secured credit card, unlike a prepaid debit card, is actually a real and legitimate credit card account.

When you are approved for a secured credit card, you will be required to make a deposit equal to the credit limit on the new account. For example, to open a secured credit card with a $400 limit you would need to make a security deposit of $400. You’re essentially buying the account with your security deposit.

Many consumers confuse secured credit cards and prepaid debit cards since both require you to put down your own money when opening the account. While prepaid debit cards actually behave more like gift cards, secured credit cards are a completely different animal.

If you charge $50 on your prepaid debit card, then $50 is deducted from your initial deposit. If a you make a $50 charge on your secured credit card then you are responsible to pay the $50 back, plus interest if you do not pay off your balance in full.

The Benefits

Because secured credit cards are an actual extension of credit they are a good indicator of credit risk, or the lack thereof.

Secured credit cards are also reported to the credit bureaus and will appear on your credit reports. Although most secured credit cards report to the three major credit bureaus there are some that do not. Be sure to check that your credit card issuer will report to the credit bureaus before you apply for the card.

When managed properly, secured cards have the potential to help you rebuild your credit because of the addition of a positive account to your credit reports.
Having said that, secured credit cards are not a magic bullet that will rid you of your negative credit issues. But, they can help to begin offsetting some of the past credit damage. They are a step in the right direction.

Easy but Not Automatic

While approval for a secured card is typically easy even for the post-bankruptcy consumer, it is not a foregone conclusion. It’s still possible to be denied.

Read the fine print in the application or, better yet, ask the issuing bank about its approval criteria before applying for the card.

The issuing bank can disclose whether they do business with consumers who have recently filed bankruptcy. If it doesn’t then it’s best to apply with someone else so you don’t waste your time and the potential damage caused by the credit inquiry.

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