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Credit Cards

What Is a Secured Credit Card and How Does it Work?



woman holding credit card

Secured credit cards are similar to regular credit cards, but require a cash deposit and are primarily used to help borrowers build or rebuild their credit. If you’re starting to build your credit history or have a low credit score, you’re likely still eligible because you’re borrowing against your own deposit.

Otherwise, secured cards function identical to a normal credit card, meaning you can make purchases at most retailers and payments are due monthly. In general, secured credit cards have higher interest rates than unsecured cards. Some people might look at a secured credit card as a prepaid card. 

As long as the card company reports to the three major credit bureaus, your activity with the new card appears on your credit report. Building creditworthiness with on-time payments will help improve your credit score. If you’re unable to make payments, the security cash deposit is used to settle the debt.

typical traist of a secured credit card

Who Uses a Secured Credit Card?

If you’re a teenager, student, immigrant or new to borrowing, it can be difficult to get approved for a regular, unsecured credit card. A secured credit card is a great way to start, and you can later switch to an unsecured credit card once you’ve established a credit line.

You might also try a secured card if you have a poor credit history. As long as you keep up with repayments, you can likely improve your credit score within six to 12 months. 

people who may benefit from a secured card

How Does a Secured Credit Card Work?

After putting down a cash deposit, a secured credit card can be used for normal purchases like shopping, gas and paying utility bills. If the balance is paid off each month, there are no interest charges. 

Here are a couple of things to note about secured credit cards:

  • In most cases, the cash deposit equals the amount you can borrow—otherwise known as your credit limit. For example, to get a card with a credit limit of $300, a deposit of $300 is likely required. In some cases, the deposit is less than your limit.

    The credit limit on secured credit cards is generally lower than unsecured cards, ranging from $200 to $1,000 on average, while some go as high as $10,000.

  • A secured card’s interest rate—also known as its annual percentage rate (APR)—is typically higher than that of an ordinary card.

    It’s often above 20%, but even so, there are some reasonable rates available. As with unsecured cards, if you pay off your balance in full at the end of the month, you won’t need to worry about paying any interest.

Secured credit cards are issued by the same financial institutions as regular cards, including online banks and dedicated credit card companies. Most secured credit cards have a small annual fee or no fee at all to keep your account open. 

Some have introductory bonuses and perks that match the cash earned in the first year. 

Before applying for a secured credit card, review the eligibility requirements, fees and interest rates to determine the best one for you. 

Secured vs. Unsecured Credit Card

A secured credit card requires a deposit, while an unsecured credit card doesn’t. Both allow you to make purchases and pay monthly, but unsecured credit cards tend to have better terms overall.

That’s why if you start with a secured credit card, you’ll eventually want to transition to an unsecured credit card. You’ll see lower interest rates, higher credit limits and better rewards and perks. 

Here are some tips on how to transition from a secured card to an unsecured card.

  • Speak to your card issuer: The easiest way to transition to a new unsecured card is to ask your secured card issuer if they have one that’s available to you. Some credit card issuers will automatically screen you for an unsecured card after several months of on-time payments.
  • Reduce your credit utilization: A common way to end up being rejected for credit is to have a high credit utilization rate. Credit utilization is the amount of credit you’re using out of the total credit you have available.

    Try to pay off as much of your debt as you can before applying for an unsecured card. Again, this illustrates to the lender that you borrow conservatively and are less of a risk.

  • Aim for a credit score that is above 650: Most lenders consider FICO® credit scores between 650 and 739 to be “good.” If your score is below 650, you may have a hard time transitioning from a secured to an unsecured card.
  • Wait before closing your secured card: Closing your secured card will impact your credit score. It might decrease the length of your credit history or increase your credit utilization.

    To be safe, wait until you’ve been accepted for your new card before closing the old one. When you close your secured card account, you’ll get your deposit back.

secured credit card verus unsecured credit card

Tips for Using a Secured Credit Card

Even though your secured card is backed by a deposit, don’t forget that you’re still borrowing money. If you fail to make the payments, you’ll be charged late fees and interest, and your credit score could be affected. Here are some tips for managing your secured card.

  • Make sure your payments are reported to the credit bureaus: There are three main credit bureaus in the United States: Equifax, Experian and TransUnion. Not all credit card companies report to all three, and you’ll need your score to be good on all of them. Before applying, see if the card issuer reports to all three.
  • Make multiple payments within the month: There’s no way of knowing when exactly your credit card company sends information to the credit bureaus. Making several small payments throughout the month ensures you keep your balance low whenever the reporting is done.
  • Always pay on time: One missed payment can affect your credit report for as long as eighteen months and can be a setback to rebuilding your credit.

    If you’re worried you’ll forget to make a payment, set up alerts on your phone, or better still, pay automatically by direct deposit.

  • Be wary of perks and bonuses: Some secured credit cards have appealing introductory offers and rewards. Be careful. Rewards and bonuses are designed to encourage you to spend. Don’t spend money on anything you wouldn’t normally buy.
secured credit card best practices

Secured Credit Cards: A Good Starting Point

When used wisely, a secured credit card can be an excellent way of building credit. It also allows you to learn how to use credit properly if you’re new to borrowing. But remember, a secured credit card is still a credit card.

If you’re considering applying for one, think carefully about whether you can make the payments before taking the plunge. If you’re trying to rebuild your credit, consider a credit repair consultation first.

Sources:Discover | Investopedia | Smart Asset | Yahoo Finance

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Credit Cards

Does Getting Joint Credit Cards Have an Impact on Both Spouses’ Credit?



couples credit history

While marriage can help you improve your financial situation, it does not automatically mean that you and your spouse will share a credit report. Your credit records will remain separate, and any joint accounts or joint loans that you open will appear on both of your reports. While this can be advantageous, it’s critical to remember that joint account activity can effect both of your credit scores positively or negatively, just as separate accounts do.

Users Who Are Authorized

An authorized user is a user who has been added to an existing credit account and has been granted the authority to make purchases. Authorized users are typically issued a card bearing their name, and any purchases made by them will appear on your statement. The primary distinction between an authorized user and a shared account owner is that the account’s original owner is solely responsible for debt repayment. Authorized users, on the other hand, can always opt-out of their authorized status, although the principal joint account owner cannot.

If your credit score is better than your spouse’s as an authorized user, he or she may benefit from a credit score raise upon account addition. This is contingent upon your creditor notifying the credit bureaus of permitted user activity. If your lender does report authorized users, the activity on your account may have an effect on both you and your spouse. However, some lenders report only positive authorized user information, which means that late payment or poor usage may not have a negative effect on someone else’s credit. Consult your lender to determine how authorized users on your account are treated.

Joint Credit Cards Have an Impact on Your Credit Score

Opening a joint credit account or obtaining joint financing binds both of you legally to the debt’s repayment. This is critical to remember if you divorce or separate and your spouse refuses to make payments, even if previously agreed upon. It makes no difference who is “responsible,” the shared duty will result in both partners’ credit histories being badly impacted by late payments. Regardless of changes in relationship status or divorce order, the creditor considers both parties to be liable for the debt until the account is paid in full.

Accounts Individuals

Whether you’re happily married or divorced, you and your spouse may decide to open separate credit accounts. Most creditors will enable you to transfer an account that was previously joint to one of your names if both of you agree. However, if there is a debt on the account, your lender may refuse to remove your spouse’s name unless you can qualify for the same credit on your own. Depending on your financial status, qualifying for financing and credit on a single income may be tough.


While creating the majority of your accounts jointly with your spouse may make it easier to obtain financing (two salaries are preferable to one), reestablishing credit independently following a divorce or separation is not always straightforward. To make matters worse, your spouse may wind up causing significant damage to your credit rating following the separation, either intentionally or through irresponsibility – making the financial situation much more difficult.

Before you rush in and open accounts with your spouse, take some time to discuss the shared responsibility of these accounts and what you and your husband would do in the event of a worst-case situation. These types of financial discussions can be difficult, especially when you rely on items lasting a long time, but a mutual understanding and respect for each other’s credit can go a long way toward keeping your score when sharing an account.

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Credit Cards

Should you pay down debt or save for retirement?



rebuilding credit

While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.

Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.

If you have high-interest debt, pay it down

When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).

In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.

High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.

To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.

If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.

Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.

If you’re nearing retirement, start to save

The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).

Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.

Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.

Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.

Aim for both goals by improving income

As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.

The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.

If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.

For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.

While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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Credit Cards

How does a loan default affect my credit?



loan default

Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.

Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.

30 days late

Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.

The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.

More than 30 days late

Payments that are more than 30 days past due can trigger increasingly serious consequences:

  • The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
  • You may receive phone calls and letters from creditors demanding payment.
  • If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.

Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.

Other ways a default can hurt you

Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:

  • If you default on a car loan, the creditor can repossess your car.
  • If you default on a mortgage, you could be forced to foreclose on your home.
  • In some cases, you could be sued for payment and have a court judgment entered against you.
  • You could face bankruptcy.

Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.

How to avoid a loan default

Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:

  • For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
  • For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.

Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.

Clean up your credit

The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.

Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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