Q. After I lost my home to foreclosure, my credit cards were canceled. I’m having trouble getting new plastic. What’s my best option?
A. Think about a “secured” credit card. Issued by banks and credit unions, these require a cash collateral deposit that backs your credit line. For example, if you deposit $500 in that bank account, you can charge up to $500. If you don’t pay, the issuer can take the money from the account.
Secured credit cards are widely used to establish first-time credit histories — college students often carry them. With responsible use, they can also help repair an old but damaged record.
The cards may come with sky-high interest and fees. And even then, there’s no guarantee you’ll get one. Issuers often have stiff rules for people with damaged credit records — no recent bankruptcies, for instance. Or you might be required to deposit more money than you’re allowed to charge.
“These cards are not meant for long-term relationships,” says Ruth Susswein of Consumer Action, an advocacy group. But, with good payment behavior, you might qualify for a mainstream card in 12 to 18 months. “Get in, pay on time … rebuild good credit and get out again when you qualify for unsecured deals,” she says.
If you decide to go this route, shop around — some cards are better than others (some, for instance, will pay you up to 1 percent interest on your deposit). You’ll want to ask if your good credit behavior will be reported to the three credit bureaus. Ask, too, if the issuer will tell the bureaus that it’s a secured card you’re using. Your credit score is likely to rebound more slowly if this fact is known.
Check surveys of the cards by Consumer Action and the website Bankrate.com. You might also ask your own bank or credit union if it offers such a card.
You may also like: 4 ways to dispute mistakes in credit reports.
Sid Kirchheimer writes about scams and consumer issues.