Using a Secured Loan or Credit Card to Rebuild Credit

by John Stevenson on September 5, 2014

Secured loans and credit cards are offered to persons with less-than-perfect credit, and they are easier to obtain. Borrowers with poor credit have a better chance of getting approved for a secured loan if they offer collateral to the lender. Thus, risk is less of a factor. People who apply for a secured credit card deposit money with the credit card company. The issuer can seize the deposit if the borrower is unable to keep up with payments.

Credit history is based on two different factors: revolving credit, such as credit cards, and installment loans, like personal loans. To build or rebuild credit, borrowers need to have a good record with both revolving credit and instalment loans. The problem is that borrowers who experience financial problems and build up a couple of negative transactions find it difficult to dig their way up. Borrowers with poor credit are usually offered outrageous interest rates or are turned down by financial institutions because of their poor credit history. That is why borrowers resort to secured loans. Those who have some valuable asset to offer against the loan stand a better chance of having their loan application approved. Moreover, they are often offered a more reasonable interest rate, thus saving money on interest. Lower interest charges make payments more manageable and thus, borrowers find it easier to keep up with their monthly payments. Regular payments, on the other hand, help rebuild credit.

Using a prepaid card or a secured credit card is another way to rebuild credit. Secured credit cards are offered by mainstream banks, many credit unions, credit card companies, and other financial institutions. Not all banks offer secured credit cards, and there is a trend is the banking sector toward unsecured credit cards. Many banks started offering unsecured credit cards with higher fees and interest rates and lower limits. Still, it pays to shop around because using a secured credit card is a good way to rebuild credit. Secured credit cards are intended for people who seek to establish or rebuild credit after some major event, for example, serious illness, loss of job, or divorce. To this, borrowers are advised to make sure the card issuer reports to all credit reporting agencies. If they do not report, the borrower has lost a key benefit. As a rule, if you start getting offers for unsecured credit cards after having made on-time payments for several months, you will know that the card issuer is reporting. Inquire whether the bank flags the report as a prepaid or secured credit card because this will be a deterrent to establishing or rebuilding credit. How long does it take before borrowers are offered an unsecured credit card? Banks and credit card companies want to keep their customers and will qualify them for an unsecured credit card after making regular payments over a certain period of time. On average, it takes about a year to build credit and qualify for an unsecured card.

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