Meet Sara and Randy. Sara is a newly-arrived immigrant to the United
States and Randy is a middle manager at Corporate Co. The two met six months ago on Tinder and have
been together ever since. Their future looks bright, except for one
thing: bad credit. To put it bluntly, Randy has horrible credit,
mostly due to a previous bankruptcy. Sara’s isn’t much better.
As a newly minted permanent resident, she
has no credit history to speak of. Both of them would like to improve their credit,
but have no idea where to start. What should they do? Well, luckily for Sarah and Randy, there’s
actually a product, called a secured credit card, designed specifically for people in
their situation. However, if Sara and Randy don’t have a
firm understanding of what a credit card or credit score is, or how to effectively use
either, we highly recommend watching our three videos “Credit Cards 101”, “Credit Scores
and Reports 101”, and “Credit Cards: Mistakes and Best Practices” before continuing further. But let’s get back to the matter at hand. What are secured credit cards? Simply put, they are credit cards designed
for people with minimal income and no or low credit scores, generally below 600. Normally, banks consider these people very
risky, aren’t willing to give them a credit card. However, in the case of secured credit cards,
they’re actually willing to make an exception, simply because they require applicants to
deposit cash with them.
This cash then serves as the basis of the
card’s credit line. For example, if you deposit $200 with the
bank, your credit card will then be given a $200 credit line. Not only that, if then you max out your card
and fail to repay, the bank can take that money as collateral. This little quirk, plus high interest rates,
can make secured credit cards seem unattractive. However, they do have one undeniable benefit. Any transaction done with one is reported
to the three credit bureaus. That means if Randy and Sara responsibly use
their secured credit cards, the bureaus will eventually bump up their credit score. Pretty great right? So what’s the best way to “responsibly”
use a secured credit card? Well, turns out it means almost never using
it. Randy and Sara should continue to use debit
cards for almost all of their purchases.
In fact, they should only ever use their secured
credit cards for one small purchase every month, like a gallon of milk, and always completely
pay that balance off on time. This regimen will minimize the amount of credit
used, while maximizing on-time payments, both of which overtime will lead to a very healthy
credit score. In fact, within a year or two of responsibly
using a secured credit card, Sara and Randy should have have credit scores at least above
640.
At this point, they should be eligible for
great unsecured credit cards and loans! Hopefully you now understand how to rebuild
your credit. Be sure to watch our next video, which covers
how to get out of credit card debt, and be sure to check out our website, where you can
find more educational content, your free credit score, and great credit card recommendations..