Dallas Fort Worth Area Homes and Real Estate

Secured Credit Cards

As a realtor in the city with the lowest average credit score of the largest 25 cities in the U.S. (Dallas, TX), I spend an enormous amount of time working with aspiring home owners on how to rebuild their credit.   Every situation is different, but one particular theme keeps repeating itself over and over again. 

People who made some credit mistakes in the past, whether it be old collections, late payments, or bad credit from a divorce, medical condition or job loss, and now they can't get approved for a gas card with a $100 limit.  Their credit score constantly hovers in the mid 500 range and they can't seem to get it higher, no matter how many old collections they pay or how many times they've paid money to a credit repair company.  They've tried relentlessly to get approved for credit cards, tirelessly filling out applications at every retail store in town, all to no avail. 

They might have even done something drastic, like take out a car loan (that they really didn't need) at a ridiculuosly high rate often in the double digits, thinking it was the only way to help their credit score.  Then they find out that the car lot they purchased from doesn't even report to the credit bureau (uness, of course, they DON'T make their payment on time).  Their friends and family shower them with well-meaning but ill-informed advice that doesn't seem to produce any results.  They seem destined for a life as permanent renters with a bad credit score....

Until one day they are referred to me and I tell them a secret that they didn't know about.  I might be the tenth lender in the last two years to deny them for a loan, but i spend a little more time educating them on credit and explain how this secret works.  Why didn't they hear about this before? 

Several reasons.... 

Nobody has any vested interest in promoting this product because there's little profit, compared with its high credit limit cousins.   There are very few people who really know how credit scoring works, and even fewer who realize that rebuilding good credit is as important, if not more important, than cleaning up old derogatory credit.  

And it takes a little bit of time to accurately explain this concept, so many people just don't bother.  It seems too complicated, so they have a hard time accepting the fact that there's a product that can help them...but if they take the time to LISTEN to what i have to say and FOLLOW the gameplan that i give them, the majority can become home owners within a year, provided they can actually afford a home and are capable of making timely payments.   

This is not a "get a perfect credit score in a day" scheme, because those just don't exist.  If it were that easy to get a perfect credit score, everyone would have one.  It's also not for people who are unable to make timely payments on current bills.  IT IS specifically for those who have enough income to afford minimal payments, but have a hard time getting approved for any type of credit because of past issues and lack of credit. 

The process takes a little bit of time.  Sometimes a couple of months, sometimes maybe a year.  It all depends on the situation.  To those that listen and take action, i guarantee their chances of getting approved for a home loan will improve dramatically.  To those that simply do nothing, i can only make one guarantee...they will more than likely have the same credit score a year from now and i will still be unable to help them with a loan. 

So what is this secret?  It's called SECURED CREDIT.  Specifically, SECURED CREDIT CARDS and SECURED INSTALLMENT LOANS.   Secured credit is very easy to get because the amount of the credit line is secured with a savings deposit.   So basically it's a "loan trade" with a bank, so to speak. 

For example, a bank will usually not think twice about giving someone a credit card with a $500 limit if that person also gives them a loan, held as a security deposit in a savings account, for $500.  I call it a loan trade because it really is a loan to the bank (secured by the FDIC, of course) in exchange for a loan.   

Let's look at things in perspective for a moment.  Every time you deposit your paycheck at the bank, you are LOANING the bank money.  The bank doesn't take cash and put it in a lock box, they loan your money to other bank customers in the form of car loans, personal loans, mortgages, etc.  That's how all banks make a profit; that's their business.  It's not physically YOUR money until you withdraw it or spend it by writing checks or using your debit card.  The same holds true for CD's or savings accounts.  Yes, the bank has a record that you have money in an account and you have a claim to that money, but that money is ON LOAN TO THE BANK so THEY can make money by loaning it out to other bank customers!  So why not make the bank give you a loan for some of that money that you're not using to help your credit score?  It makes sense, doesn't it?

Of course it does.  And banks will rarely, if ever, volunteer this information.  Why?  Again, they don't make much money by promoting them, they're low profit for banks.  Banks are also not in the business of credit education (although they should be)  They would also rather give people UNSECURED loans with good credit scores since unsecured loans demand higher interest rates.   

And why would someone with good credit need a secured loan anyway?  They don't because they can get a loan without using their own money because they have a good credit score...which is YOUR GOAL!  So use the bank's money (backed by a savings account in your name) to build your credit history!

So what's the best kind of secured credit to get?  Well, if your goal is to qualify for a mortgage, remember that the standard minimum credit requirement for a mortgage loan is to have at least three accounts that have been open and active for at least 12 months.  These can be a car loans, student loans, or any type of loans, such as credit cards, as long as it reports to the three major credit repositories.  Some loans do have the option of using non-traditional credit, but that will not help your score. 

The good thing about a secured credit card is that it stays open indefinitely (unless you or the bank closes the account).  And the longer an account is open, the better it tends to improve the credit score (provided the account is paid as agreed and the balance is less than 50% of the credit limit).  So if you have no credit or have less than three accounts on your credit report, a secured credit card is the best way to fill in the gaps! 

One neat thing is that you don't have to physically go down to your own bank to get a secured credit card.  In fact, there's no law that says your bank HAS to do offer secured credit cards, and many don't, so don't be surprised if they turn you away.  However, there are many online banks that specialize in secured credit cards.  They also allow an account to be set up online and the money to fund the account can be withdrawn from your current bank account, provided you have your routing and account number. 

It's a very simple process, and the card usually arrives within a few weeks.  Besides that convenience, many also offer online payment options and other services that aren't available at some larger banks and credit unions.  Once you receive the card, it's very important to remember these important points:

• PAY AT LEAST THE MINIMUM PAYMENT ON TIME EVERY MONTH!  It's never a good idea to carry a balance on a credit card, but the worst thing you can possibly do is not make the payment ON TIME!  Even missing a $10 monthly payment by 30 days will mean a late payment that will stay on your report for seven years.  Technically, they can't report you as late unless you're 30 days late, but remember it takes time for mail payments to be processed, so send the check early if possible.  And the bank can and will impose stiff late fees for missing a payment by even one day.  
• TRY TO KEEP THE BALANCE AT OR BELOW 50% OF THE LIMIT.  Carrying a high balance on a credit card tends to lower the score, so be careful.  If you do go over 50%, try to pay it down under that level as soon as possible.  Once it returns to under that threshold, your credit score should increase.
• DON'T GET TOO MANY CREDIT CARDS.  Credit cards are like pain pills.  One or two will make the problem better, but too many will make it worse.  Remember, mortgage lenders want to see three accounts, and there's no reason to have more than that.  And they don't have to be all credit cards, but secured cards are a nice way to fill in the gap if you're short on having three.

So why not put that money that's just sitting in a savings account to good use?  Don't commit to more than you can afford, but remember, you're putting your money to work for you to improve your credit score.  Most banks will hold that money until they feel you have demonstrated a good ability to make timely payments.  Keep up the good work and there's a good chance they will release the deposit back to you (usually 12-24 months).  Then you will officially have an unsecured credit card. 

And if you decide you want the money back, just pay the balance owed on the card and the bank will return the deposit (and close the credit card).  Just remember, you worked this hard to get your good credit score back, so keep responsible habits and you'll be able to get better rates on many things, not just home loans.... 

Every situation is different.  I want to stress that point.  If qualifying for a mortgage someday is your goal, talk to a mortgage professional now.  Contact me for a consultation and referral to a local mortgage professional that will help you make the right decisions to get you into a new home as soon as possible.