After bankruptcy or prolonged debt, it can be difficult to know where to start when rebuilding your credit. When filing for bankruptcy, your Trustee can advise you on ways to rebuild your credit and maintain a solvent budget. Bankruptcy or not, overloading your credit cards and not making minimum payments will certainly crash your credit access. Free credit counselling may certainly be a beneficial step to take. Also, ‘secured credit’, otherwise known as ‘prepaid credit’ is one way to access credit for those with a poor credit payment history and may provide you with an opportunity to start rebuilding your credit again.
What is “Secured Credit”?
Secured credit is a loan or credit tied to some form of collateral. Common examples are car loans and mortgages, which are tied to your car or your home, respectively. In most secured credit agreements, a lien is placed on the collateral. If you fail to make your scheduled payments, the collateral can be repossessed.
The main advantage of secured credit is that it is available to those who don’t have a good credit rating/have failed to make monthly payments. Securing the credit to an asset gives the creditor recourse if you fail to make your required payments, making them more likely to approve you for a loan or some form of credit.
Secured Credit Cards
Secured credit cards are credit cards that are secured with a down payment or upfront fee. The down payment will vary depending on the bank, but it can be anywhere from $200 to $500 dollars. The bank can keep this money for up to two years.
While you do have to pay upfront, secured credit cards may be a good option for people looking to rebuild their credit history. It might also be one of your only options for a credit card if you have filed for bankruptcy or if you have a history of debt and missed payments.
To rebuild your credit with a secured credit card, plan to make consistent, small purchases with the card that you pay off ‘in full’ every month. Small, recurring payments or bills are a good place to start. Over time, this will help rebuild your credit as it creates a history of consistent payments and demonstrates responsibility.
Secured Credit Lines
Typically, in order to qualify for a line of credit, you need a good credit payment history which is represented by a ‘score’ and qualifying for secured credit means achieving a score over 700 coupled with a history of on-time loan repayment. Secured credit lines provide an alternative for people who are rebuilding their credit or who don’t have any credit history.
Secured credit lines are similar to secured credit cards, except instead of making an upfront payment the credit is tied to an asset. The credit is secured to an asset as collateral, often a car or your home. There are also home equity loans, which are a form of secured credit lines where the collateral is the equity in your home.
In some cases, secured credit has the benefit of a lower interest rate compared to unsecured credit. That said, it is important to be aware that if you fail to make scheduled payments, the creditor can seize the asset to which the loan is tied.
If you have questions about how to rebuild your credit after years of debt or bankruptcy, our Licensed Insolvency Trustees are here to help. Contact us today for a free consultation and personalized financial advice.