Having less-than-stellar credit can affect many aspects of your life, from how much interest you pay to being outright denied any form of credit whatsoever.
Many people with bad credit find themselves in a situation where they can’t get approved for a new credit card. Because getting a credit card and being responsible with it is one of the key ways to improve a credit score, this can lead to a tricky cycle.
Thankfully, credit repair specialists at The Phenix Group are available to help with these problems and get your credit back on track. There is a way to get approved for a credit card in most cases–even with bad credit–and it involves one of the three Cs of credit–and that’s collateral.
What Is Collateral?
Collateral is when a person borrows money from a financial institution and then puts up a piece of their property as a guarantee. What this means in practical terms is that if you take out a loan and put your car up as collateral, if you fail to repay the loan, the bank will seize your car and sell it in an attempt to get their money back.
How Does Collateral Work With Credit Cards?
Banks that offer credit cards will often offer what is known as a ‘secured credit card.’ How a secured credit card works is exactly the same as a normal credit card–you have a credit limit, there is a minimum payment to be met each month, and the bank charges interest on any unpaid balance that remains at the end of the month.
The difference is that with a secured credit card, you are required to make a deposit at the bank that they will hold onto as collateral against your credit card. Typically, the amount deposited is the same as your credit limit. If your credit limit is $500, you’ll be required to deposit $500 with the bank in a secured account before being approved.
Isn’t This Just Borrowing From Myself?
Yes and no–you’re borrowing money from the bank every time you make a purchase on the card, and you are required to make a monthly payment on that card from a separate account, not the secured account. However, if you don’t pay the monthly payment, the bank will deduct it from your secured account.
Wouldn’t It Be Better to Just Spend My $500?
Just because you can, doesn’t mean you should. In the case of secured credit cards, the goal is to use it to improve your credit score. Your regular checking account with $500 is not reported to the credit bureaus that determine your credit score. Credit cards, on the other hand, report each and every month to the credit bureaus.
This means that, over time, you’ll build a clean payment history on an open account. This will help to raise your score and allow you to get approved for unsecured credit cards or larger loans, such as auto and home loans. For many people with bad or no credit, secured cards are an excellent way to build credit and help get their credit score back on track.
Final Thoughts
To help supercharge the process of credit repair, you can always seek the services of a licensed, reputable credit repair company like The Phenix Group. We can help remove erroneous information from your credit report and provide tips and tricks on best practices to get your credit back on track–and make sure it stays that way.