Rebuilding credit? Hybrid 'semisecured credit card' may help
With better terms than a secured card, they can be good stepping stones
Consumers looking to establish new credit or repair bad credit have another tool with which to rebuild their financial lives: a semisecured card. This somewhat rare hybrid card affords a bit more freedom than a secured card, but you'll need to watch out for potential pitfalls to make sure you get the most of it.
Like a fully secured credit card, semisecured or partially secured cards require users to put up a financial stake. But, unlike secured cards, the credit limit on a semisecured card is greater than the security deposit, making a semisecured card function more like a conventional credit card.
"The semisecured card is the middle path between secured and conventional for those rebuilding their credit," says Kim Cole, education outreach coordinator at Navicore Solutions, a financial counseling service. "This card is best suited for someone who is on the path to financial recovery. Their credit is too good for a standard secured card, yet their score is not high enough for a conventional card."
Consumers who have little or no credit history or who have past credit issues -- such as payment problems or bankruptcy -- may start with a secured card and graduate to a semisecured card. Both types of cards require a deposit from the cardholder to offset any potential risk to the card issuer.
But, semisecured cards offer more generous credit terms. With a secured card, it's a one-for-one proposition. For instance, put up $200 in collateral, and $200 is the maximum you can spend with the card.
Semisecured cards, on the other hand, allow users to charge more than whatever deposit they provide. While amounts differ depending on the issuer, the applicant's credit score and a documented ability to pay, users generally obtain credit lines roughly twice the value of their security deposit.
"For instance, if you put up $200, you may receive a credit line as high as $500," says Cole.
Qualifying for a
Qualifying for a semisecured card is a bit harder than qualifying for a conventional secured card. "A customer may qualify for a partially secured credit card based on a number of factors, including how they have managed other accounts with us, credit bureau information and ability to pay," says Bank of America spokeswoman Betty Riess.
Applicants will also likely have to show evidence "they're on the path to financial recovery," says Cole. "For instance, if someone filed for bankruptcy but has since been working to improve their credit, this can be an ideal way to rebuild their credit," she says. "In that sense, they're a good alternative, a good middle ground."
One goal of a semisecured card is to establish a sufficiently solid payment record so the cardholder can shift over to a regular credit card. Accordingly, consumers should make sure all activity with a semisecured card is reported to credit bureaus.
Just how long it takes to qualify for a regular card will vary. Cole says many banks will offer a semisecured customer a regular card after six months of timely payments. If it takes longer than that, ask if you're eligible to move up. Other credit card companies may require a longer waiting period, but the longer they take, the better the chance that you'll receive other offers.
If someone filed for bankruptcy but has since been working to improve their credit, this can be an ideal way to rebuild their credit. In that sense, they're a good alternative, a good middle ground.
|-- Kim Cole
"Since activity is being reported to the credit bureaus, other card issuers will also see that Sally Smith is building a solid credit history," says Kevin Weeks, president of the Financial Counseling Association of America (and a weekly columnist for CreditCards.com). "If they don't eventually offer her a regular card, she could be offered a card by another bank."
Caveats and considerations
Semisecured cards can be a little tricky to find. They are not terribly common, so you may need to call various card issuers to see if they offer them.
If need be, stick to your guns when inquiring about a partially secured card. For instance, despite its name, Capital One's Secured MasterCard is also available as a partially secured product. That can lead to some confusion: A Capital One phone representative repeatedly insisted the company offered no partially secured products.
When shopping for a semisecured card, be sure to pay attention to the APR. Although interest rates on most semisecured credit cards are likely to be steep (expect rates beyond 20 percent), shop thoroughly, as rates will differ. For instance, BankAmericard Secured Visa (another card that, despite its name, is available as a semisecured card) carries a 20.24 percent APR, while Capital One Secured MasterCard ramps up to 24.9 percent.
"Search for cards that offer the lowest interest rates possible and low annual fees," says Hersh Shefrin, behavioral finance professor at Santa Clara University. "There are plenty of unscrupulous lenders seeking to exploit people with bad credit."
A couple of years ago, an entity known as AmTrade International Bank solicited consumers with semisecured credit card deals. Consumers were asked to mail in up to $900 to obtain a semisecured card with which to rebuild credit. The checks were cashed but victims never received any card in return. The takeaway: Stick with well-known, established companies.
Weeks urges consumers to find cards that offer the most generous credit limits with the smallest required security deposit. Additionally, make certain that your deposit earns interest. Fully secured cards' security deposits rarely collect any interest, but semisecured deposits often do.
Bear in mind, too, that responsible use may lead to an unsecured card, but it likely will come with a low credit limit. But, as Weeks points out, "their limit will increase over time as the holder continues to show timely payments each month."
Lastly, make certain you understand the issuer's policy with regard to missed payments. In other words, if you fail to pay on time, how quickly will the issuer grab your deposit and close your account?
"Some creditors may close the account right away with just one missed payment," says Weeks. "And, on top of that, missing a payment defeats the whole purpose of why you have one of these cards in the first place."
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