Meet Sara and Randy. Sara is a newly-arrived
immigrant to the United States and Randy is a middle manager at Corporate Co. The two
met six months ago on Tinder and have been together ever since. Their future looks bright,
except for one thing: bad credit. To put it bluntly, Randy has horrible credit,
mostly due to a previous bankruptcy. Sara’s isn’t much better. As a newly minted permanent
resident, she has no credit history to speak of. Both of them would like to improve their credit,
but have no idea where to start. What should they do? Well, luckily for Sarah and Randy, there’s
actually a product, called a secured credit card, designed specifically for people in
their situation. However, if Sara and Randy don’t have a firm understanding of what
a credit card or credit score is, or how to effectively use either, we highly recommend
watching our three videos “Credit Cards 101”, “Credit Scores and Reports 101”,
and “Credit Cards: Mistakes and Best Practices” before continuing further. But let’s get back to the matter at hand.
What are secured credit cards? Simply put, they are credit cards designed
for people with minimal income and no or low credit scores, generally below 600. Normally,
banks consider these people very risky, aren’t willing to give them a credit card. However,
in the case of secured credit cards, they’re actually willing to make an exception, simply
because they require applicants to deposit cash with them. This cash then serves as the basis of the
card’s credit line. For example, if you deposit $200 with the bank, your credit card
will then be given a $200 credit line. Not only that, if then you max out your card and
fail to repay, the bank can take that money as collateral. This little quirk, plus high interest rates,
can make secured credit cards seem unattractive. However, they do have one undeniable benefit.
Any transaction done with one is reported to the three credit bureaus. That means if
Randy and Sara responsibly use their secured credit cards, the bureaus will eventually
bump up their credit score. Pretty great right? So what’s the best way
to “responsibly” use a secured credit card? Well, turns out it means almost never using
it. Randy and Sara should continue to use debit cards for almost all of their purchases.
In fact, they should only ever use their secured credit cards for one small purchase every
month, like a gallon of milk, and always completely pay that balance off on time. This regimen
will minimize the amount of credit used, while maximizing on-time payments, both of which
overtime will lead to a very healthy credit score. In fact, within a year or two of responsibly
using a secured credit card, Sara and Randy should have have credit scores at least above
640. At this point, they should be eligible for great unsecured credit cards and loans! Hopefully you now understand how to rebuild
your credit. Be sure to watch our next video, which covers how to get out of credit card
debt, and be sure to check out our website, where you can find more educational content,
your free credit score, and great credit card recommendations.