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How I Used Secured Credit Cards to Rebuild Credit

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If you have bad credit, a limited credit history or a recent derogatory mark on your credit report, you might have trouble applying for many of today’s top credit cards. But there is another way for you to prove that you can handle credit responsibly—a secured credit card.

Secured credit cards give you access to a small line of credit in exchange for a security deposit (usually the same amount as your credit limit). Since you’re securing the line of credit with your own money, lenders are often comfortable issuing secured cards to people who have little to no credit or who are recovering from financial setbacks like bankruptcy.

We spoke to three cardholders who discovered just how big a difference a secured card with a small credit limit can make.

Here’s what they learned as they used secured cards to build their credit history and improve their credit score—and what you can do if you’re ready to do the same.

A secured card is an opportunity to show responsible credit habits

Jessica Clark, who runs a cooking blog, Gluten Free Supper, and her husband turned to secured credit cards as a way to dig themselves out of a bad credit hole. “My husband and I had to file Chapter 7 bankruptcy about seven years ago,” Clark said. “We really wanted to purchase a home, but knew that would be next to impossible with having just filed bankruptcy and having bad credit.”

“I applied for a secured credit card and added my husband as an authorized user,” Clark said. “We used our cards regularly, making sure to keep our usage under 30 percent.” This strategy helped them earn the financial freedom to escape a rental market that required them to move nearly every year.

While Clark was working to improve her bad credit, Sam McRae, an injury attorney in Georgia, was in the position of not having any credit history at all. “I was taught to pay everything with cash by really frugal parents,” McRae explained. His cash-only spending had left him with no visible credit file. “After law school, I realized that I didn’t have enough credit to get a loan or a credit card.” He, too, turned to a secured credit card.

Both Clark and McRae were able to use secured credit cards to prove that they could use credit responsibly—and both of them were able to quickly build their credit scores as a result.

Once lenders are able to see that you can handle a secured credit card without overspending or missing payments, they will be more likely to increase your credit line, refund your security deposit or give you the opportunity to apply for an unsecured credit card.

Even a small security deposit can make a big difference

When you take out a secured credit card, lenders require you to pay a security deposit. This helps protect the lender if you aren’t able to pay your credit card balance. Most secured cards match your credit limit to your security deposit.

Brian T. Edmondson, founder of Bankruptcy Recovery Foundation, started to rebuild his credit after bankruptcy with a $200 security deposit on a card. But many secured cards allow you to put down even less collateral. For example, the Secured Mastercard® from Capital One allows you to start with a deposit as low as $49.

In some cases, you won’t even need to come up with the money in advance. “The secured cards that I used did not require a security deposit upfront,” Clark explained. Instead, the first statement for each card would include a fee in the amount of the security deposit. “I didn’t need to come up with the money until about a month later when the payment was due. It was doable because it was only $200.”

If you’re looking for a higher limit, some secured cards give you the opportunity to put down a larger deposit in exchange for a larger credit line. The Discover it® Secured Credit Card allows cardholders to make a security deposit between $200 and $2,500, with a credit limit to match.

Be consistent with small charges and full payments

A secured credit card gives you a chance to both practice and prove responsible credit habits. The key to building credit with a secured credit card is to use a small percentage of your credit line each month and then pay it off when your statement arrives. This demonstrates to your card issuer, and in turn the credit bureaus, that you can responsibly manage credit. As your history of moderate credit utilization and consistent payments grows, so will your credit score.

The general advice from experts is to keep your credit utilization, the amount of your available credit that you use, under 30 percent. So if you have a secured credit card with a $200 limit, that’s going to mean less than $60 in charges each month. “I initially used my secured card to make small purchases here and there,” Edmondson explained. “Such as paying for a few fast food meals a month or buying a small amount of items at the convenience store.”

While that may not seem like much, the goal while building credit with a secured card is not to manage your everyday expenses with credit—the majority of your spending will likely still be covered by cash or debit cards.

The goal is to demonstrate responsible credit use to increase your credit opportunities in the future. In fact, it took only a month for McRae’s secured card to become part of his credit history. “After the secured card was reported on my credit report, I was able to apply and be accepted for an unsecured card,” McRae said.

Understand and keep an eye on your credit score

If you’re hoping to use a secured credit card to improve your credit score, it’s important to know how your credit score is calculated. Your FICO score, for example, is calculated on the following five components:

  • Payment history (35 percent)
  • Amounts owed (30 percent)
  • Length of credit history (15 percent)
  • Credit mix (10 percent)
  • New credit inquiries (10 percent)

Similar factors are also considered for your VantageScore, although they are weighted differently. Don’t worry, you don’t need to be too concerned with the different credit scoring models. The basic principles of building credit are the same—make small charges on your secured credit card every month and then pay them off on time and in full.

Most banks and credit card issuers offer tools to help you track your credit score and many of those tools are free. The best tools for credit monitoring provide insights into recent credit score changes as well as offering tips to help you continue improving your credit.

Use these credit trackers to keep an eye on your credit score and ensure it’s going in the right direction. “I got to see my score slightly rising as I used and paid off the secured card each month,” Clark explained.

You won’t be stuck with a secured card forever

If you’re anxious about the costs associated with a secured credit card—or if you’re concerned that people might judge you for carrying a secured card—don’t worry. Secured cards look exactly like every other credit card, and most secured card issuers regularly review your account to determine whether you are eligible for a security deposit refund.

“If you use a secured credit card to rebuild your credit, at some point you will get your initial security deposit returned back to you,” Edmondson explained. “I just received my initial deposit back from Capital One for one of my secured cards.” At that point, your secured credit card will effectively become an unsecured credit card and you’ll be ready to move on to the next step in your credit journey.

McRae continues to use his secured credit card for small purchases—even after building his credit score and moving on to better credit cards. “I still use my secured card to auto-draft my Netflix account and pay it off at the end of the month,” McRae said. “I keep the secured card because it’s my oldest credit card and the payment history is perfect.”

The bottom line

If you’re struggling to get approved for a traditional credit card, a secured card could be the answer. There are many reasons people turn to secured credit cards. Some are new to credit, while others are working to rebuild after a financial setback. The formula for building credit is the same for everyone: prove responsible use by borrowing against your line of credit and paying it off in full. “Don’t be afraid of credit cards,” McRae said. “If used correctly they can be a great tool to build your credit score.”

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Are Sallie Mae Student Loans Federal or Private?

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When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances

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Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit

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Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.

 

 

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