Bad Credit? Start Over With a Secured Card

By Eileen AJ Connelly -- AP Personal Finance Writer

NEW YORK (AP) — With a credit score of 789, Lisa Dalton gets offers for platinum cards these days. But in the mid-1990s, her credit was devastated by bankruptcy and divorce.

The Chicago resident was able to turn things around by starting over with a secured credit card, a type that requires an upfront deposit and offers a very low spending limit — typically $500 or less to start.

Such cards lost favor in the free-credit frenzy prior to the recession, as many banks lowered their credit standards and issued regular credit cards to risky consumers. But with the epidemic of mortgage foreclosures and credit card defaults, and a 31 percent jump in personal bankruptcy filings last year, industry watchers expect the popularity of secured cards to grow.

"The whole thing is incredibly humiliating," Dalton said. She recalled that her bankruptcy lawyer told her she'd have to rely on cash for seven years before she would have a chance at getting any new credit. When she learned about secured cards, she said, it offered a ray of hope that she might be able to rebuild her credit sooner.

Dalton had to deposit $200 to get a $250 credit limit. She would use it for a small purchase, then pay it off. As she established a record as a responsible customer, the bank raised the limit on the card, and after a few years, switched her to a traditional, unsecured card.

The card also helped her establish enough of a positive credit history to get a mortgage. She has since opened other credit cards with better terms, and even financed part of her education to become a life and business coach.

Doran's story illustrates the way secured cards are designed to work. "It's like a bike with training wheels," said Martha Doran, a professor at San Diego State University.

Secured cards represent just a small slice of the nearly $1 trillion U.S. credit card market, and they are not without their pitfalls.

Besides the deposit, for instance, some cards charge very high fees, warned John Ulzheimer, president of consumer education for Credit.com. In fact, the first bill with some cards could include fees that eat up most of the credit limit. This could hurt your credit score instead of helping it.

They also often charge high interest rates — 19.9 percent is common — and the low credit limits make it easier to end up getting socked with over-limit charges. What's more, some secured cards begin charging interest right after a purchase, offering no grace period for customers to pay their balance off first.

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