A reader fell behind on her student loans and needs to rebuild her credit. Is a secured credit card the way to go?
A Money Talks News reader recently wrote with this question:
My boyfriend and I were looking to buy a house, but our credit is bad due to late payments on student loans. We were advised to get a secured credit card – because even if it builds our credit a little bit, it still builds it regardless.
He was offered by his bank, Wells Fargo, a secured card with a $25 annual fee, 18.9 percent APR, and a minimum down payment of $300. It doesn’t have rewards, but after 6-8 months of consistent payments, we could get offered to move over to a regular credit card. Is it worth it? Is there a better secured card out there?
Thanks for the question, Dori. Buying a house is the best reason to keep your credit score as high as possible. After all, we can eventually save up enough to buy nearly anything with cash, including a car. But saving up the required cash for a house would be tough. Good for you for realizing that to build your credit, you have to be granted credit first.
If poor credit is keeping you from receiving a standard credit card, using a secured card can help you build – or in your case, rebuild – your credit. Nearly anyone can get a secured credit card, because it requires you make a deposit first, which guarantees the credit limit.
The first thing I tell people looking for a secured card is to stay with a reputable bank that charges reasonable fees. Wells Fargo has been around for more than 150 years, and a $25 annual fee is quite reasonable. That’s why it made my list of secured cards from well-known banks. (Note that Orchard bank has since been acquired by Capital One, which also offers a competitive secured card.)
As for the lack of rewards on the Wells Fargo card, earning rewards from spending is the last thing you should be worried about right now. Your first goal should be to rebuild your credit as best you can, while saving as much as possible toward your home purchase.
That means paying all credit card and other bills in full and on time, so you can build a positive credit history while avoiding interest charges. Earning 1 or 2 percent cash back on your spending shouldn’t even be a consideration.
So take a look at some of the other competing secured cards on the market, but if you end up with the Wells Fargo product, you certainly have my thumbs up.