How to land a secured card
By Erica Sandberg
December 16, 2014
What options can be offered to a consumer who has a poor credit score and is not eligible for a secured credit card? I teach financial literacy and am often fielding these questions. Thank you in advance — Sahara
Many people feel permanently shut out of the system. They try for a credit card that's specifically developed for those with bad credit, but are still constantly denied. It's normal to feel aggravated!
It's true that secured credit accounts are usually the best way to enter or re-enter the charging world. Here's how they work: The customer provides the issuer with a specified amount, say $300, to hold as a security deposit. That money is returned when the account is closed and the balance is paid in full. The issuer sets the credit limit, and the cardholder uses the card as they would any other credit account. Just charge a sum up to the limit and pay at least the minimum by the due date (ideally keeping the balance to zero by paying the bill in full).
For lenders, secured credit card accounts are inherently less risky than unsecured accounts. Instead of having to sue a defaulted cardholder (and even then, they may be unable to recoup their losses), they can simply claim the funds held in the separate account. Have your students check the current offerings from major companies here on CreditCardGuide.com, but also have them investigate local credit unions, as some are more forgiving of past mistakes.
Even issuers that grant these types of cards set minimal qualification standards, however, so not everyone who applies is automatically approved.
All prospective borrowers should consider the lender's point of view. By looking at the lender's point of view, your students can clean up their files and in as little as a year, get approved. Here's what they should do:
First, have them appraise their personal creditability as if they were working for a card company. What would give them pause? If the consumer credit report shows debt overloaded, lending more money doesn't make much sense. The individual might not be able to afford additional payments. Or maybe the reports indicate recent and substantial delinquencies and collection activity. With a record like that, does the person appear responsible? Not likely.
Of course, lenders often use credit scores (such as the FICO) rather than read actual reports to determine eligibility. Evidence of a poor payment history in conjunction with especially big balances will drive these numbers into the ground. Bottom rung credit scores serve as a clear and powerful warning: “Beware, this applicant is a business risk!”
The other main factor is income. If the person is unemployed, earns very little, or the job is too new and uncertain, approval is in jeopardy. Without the means to support the potential balance and subsequent payments, offering a credit line is an irrational decision.
After your students understand why they may have been turned down, encourage them to take steps to improve their damaged reputation. Most negative but accurate information stays on a report for seven years, but time and action heals wounds. Have each develop a plan based on their particular problem.
If they have very high debt balances, reducing them will go a long way, as will satisfying collection accounts. Paying any active accounts (such as student and vehicle loans) on time, from this moment forward, will certainly create trust and hike up a score in as little as a year. Gaining steady employment is a must. Once done, they need to save enough for a deposit that they can spare for the secured account. At that stage they will be ready to apply again. Approval should be easy.
In the event the rejections still come in or if some just can't wait to make those changes, they may want to ask a generous friend or relative to co-sign a joint account, or become an authorized user on an existing credit card. These should be last-ditch resolutions, though. The account activity will be listed on all cardholders' reports, so if something goes wrong, all parties will suffer.
Something to remind your students of: If their credit isn't good enough for an objective lender, it may not be wise to involve a loved one.
Got a question for Erica? Send her an email.