What Are the Best Charge Cards to Help Rebuild Your Credit?

The best charge cards to rebuild your credit are usually secured credit cards. Secured credit cards use an asset as collateral to provide the lender with assurance against default. There are a number of reasons to opt for a secured line of credit.

Faster Approval

The main issue bad credit borrowers will run into with getting any loan is actually achieving approval. As a bad credit borrower, you will find lenders are very tentative to extend you any financing in case you should default and they lose the money. If you provide collateral, they can seize and liquidate the collateral should you default. You take on the risk with a secured line, and the lender feels more assured you will make payments on time. While it is possible to take out a secured installment loan, you will only be able to use the loan limits once. With a revolving line, you can continually borrow up to the limit as long as you pay off the loan. This actually increases your limits over time.

Lower Interest Rates

Since the lender has more security against default because you placed collateral, the lender will charge you a lower interest rate. You will benefit from a decreased cost overall for financing. While unsecured cards tend to have a faster impact on your credit, secured charge cards will still help rebuild your credit slowly. In the mean time, you can save money by using the collateral to lower your rates.

Manageable Limits

Revolving credit, like that used on a charge card, is an innovative way to achieve high limits without risking default on a valuable loan. For example, if you think you will be able to handle a loan of $5,000 this year, you could take an installment loan for that amount. You would be required to make payments on the entire $5,000 each month, and those payments may be too high one month if you have other expenses.

On the other hand, you could get a $1,000 secured charge card. If you charge up to the card's limits 5 times during the course of the year, you will still be able to achieve $5,000 in financing. However, you will get to decide when those funds are distributed and when they are paid back. Ultimately, you have more control and more flexibility over the same amount of money.

Disadvantages of Secured Charge Cards

The main disadvantage of a secured charge card is you are assuming the majority of the risk for the loan. If something were to occur that prevented you from paying off the debt in full, you would lose the collateral you posted. This becomes extremely risky if you used an automobile, home or other valuable asset to secure the card. In order to prevent the loss of an asset that would jeopardize your safety or ability to live in a default, ensure you have enough savings to continue making the debt payments for at least three months without any income at all.

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