What Are the Best Charge Cards for Borrowers with No Credit History

The best charge cards for borrowers with no credit history are often secured against an asset. Having no credit history is essentially the same as having bad credit; the lender has no reason to believe you will not default on the debt. This makes the loan very high risk for the lender. High risk loans are punished with higher rates and lower limits. If you can reduce the risk associated with the loan, then you will get a better deal.

Collateral Reduces Risk for Lender

When you secure a credit card, you are placing collateral on the line in exchange for the funding. This collateral is valued by the lender. The lender then extends your loan as a percentage of the total value of the collateral. If you default, the lender will have an asset that is more valuable than the loan itself to seize. A lender seizes this asset and sells it to recover the funds lost on your loan. Essentially, a secured credit card poses very little risk to the lender.

Collateral Raises Risk for Borrower

The risk is entirely transferred onto the borrower with a secured credit card. You will be exposing yourself to essentially double the risk of an unsecured credit card. First, you will have to make sure to pay your monthly bills and avoid taking on too much debt to protect your credit score and avoid high interest rates. If you default, though, you will be risking both your credit score and your asset that has been placed as collateral. For this reason, many people fear putting collateral down for a credit card. There is little to fear if you manage your credit well, but there is always the chance you will experience a financial emergency that can compromise your collateral.

Types of Collateral to Use

It is possible to use any collateral the bank will accept. The most common form for borrowers with no credit history will likely be a savings account or stock certificate. Borrowers without a credit history will not typically have a car or any home equity. It is best to place collateral that you could reasonably lose if a crisis situation did occur. For example, placing your home on the line would mean you could face foreclosure at a time when you are already experiencing financial challenges. It is better to place an asset that is not essential to your personal security.

Protecting Collateral

To prevent the worst from occurring, ensure to protect your asset through responsible borrowing. This means making all of your monthly payments and paying down balances when possible. The best thing to do to avoid default is ensure you have an emergency savings account. This account should be enough to cover all of your debts for at least 3 months. If you lose your job or have another crisis, you will be able to make sure your credit card stays in good standing and your debts will not go into default by using the emergency funds to get you over the hump.

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