Denied a Secured Credit Card? What You Can Do About It
You've been denied a secured credit card. It's rare, but it can happen.
Getting a regular credit card may have been out of the question, but you would've expected to qualify for a secured credit card.
Yet:
You're still left in need for a credit line (possibly to help improve your credit score).
Learn what steps you can take now to put yourself back on track to get approved for a secured credit card -- or similar alternative -- as soon as possible.
Reasons for a Secured Credit Card Denial
Many people use secured credit cards to rebuild their credit after a serious mishap.
This might include a bankruptcy, a foreclosure, or a repossession.
A secured credit card is also useful when establishing a credit history. It takes credit to build a strong credit score.
This is because creditors use an applicant’s credit report to determine creditworthiness. If they have a blank credit file, there’s no way to gauge whether they’re a good candidate.
Even though secured credit cards are designed to help you get back on the right track, rejections do happen.
You may not qualify for a secured credit card if you’ve recently declared bankruptcy.
Look:
It takes time for a court to discharge a bankruptcy. So if you apply for a secured credit card and the creditor finds an extensive list of delinquent credit accounts or judgments, this can trigger a denial.
Rules for credit card approvals vary by bank. Some banks may have no problem issuing a secured credit card before your discharge. Yet, another bank may prefer that applicants wait until after their discharge.
So if you’re rejected for a secured credit card, wait until after a bankruptcy discharge and then apply again.
If you haven’t file bankruptcy, you may also face a rejection if you have very recent late payments on your credit report.
From a creditor’s standpoint, you’re not responsible enough to handle additional credit accounts. If you’re currently defaulting on your payments, you’ll likely do the same with a secured credit card. For this reason, some banks might not approve your application.
Credit report inaccuracy
Also, a denial could occur due to a mistake on your credit report.
A serious delinquency reported in error might turn off a potential creditor.
Or, there might be a mix-up with another person's credit history that has the same name as you.
Finally, the inability to verify your identity due to wrong personal information on file.
Whatever the error, dispute it to have the information corrected.
How Does a Secured Credit Card Work?
A secured credit card works like any other credit card.
The main difference:
A secured credit card requires a security deposit.
This deposit acts as collateral for the credit line. Keep in mind that the security deposit isn’t prepayment for the card. It simply protects the bank in the event that you don’t pay what you owe. If you default, the bank can keep your deposit as repayment.
The bank deposits your security into a bank account.
The minimum amount for a security deposit varies.
Secured credit cards often require a minimum deposit of a few hundred dollars. Just know that your credit limit will be equivalent to your deposit.
So if you give the bank a $500 deposit, you can expect a credit card with a credit limit of $500.
Ongoing use
To reiterate, this isn’t a prepaid credit card.
You’ll still receive a credit card statement each month with your most recent charges. Also, you’re still required to make your minimum monthly payment on time.
The goal of a secured credit card is to rebuild or establish credit.
To do so, pay your bill on time each month.
In addition, only charge what you can afford. If possible, pay off your balance in full every month to avoid high debt.
Also, keep an eye on your credit card statement. Don’t hesitate to dispute unfamiliar or fraudulent charges.
Graduating from a secured card
If you manage this account responsibly, the bank issuing the card may eventually refund your security deposit. At this point, the bank converts your account to an unsecured credit card.
You might be eligible for an unsecured credit card after 24 to 36 months of timely payment.
As a side note, make sure you get a secured credit card from a bank that reports regularly to the three major credit bureaus -- TransUnion, Experian, and Equifax.
What to Do If You’re Rejected for a Secured Credit Card?
Since getting this credit card can be the first step to establishing or rebuilding credit history, you’ll need to get to the bottom of the rejection.
This way, you can make any necessary improvements and qualify in the future.
1. Ask the creditor to explain the rejection
You’ll receive a rejection letter in the mail. But these letters are sometimes vague.
To better understand the reason behind the rejection, contact the creditor directly for an explanation.
That said:
Understand that you’re entitled to a free credit report if you’re denied credit. You should also get into a routine of checking your credit report each year.
Every consumer is entitled to one free credit report from each of the three bureaus every 12 months. Go to AnnualCreditReport.com to get your free copies.
2. Get a secured credit card from a community bank or a credit union
If you’re rejected for a secured credit card offered by a big bank, consider other alternatives.
While a larger financial institution may not approve your application, a smaller community bank or a credit union may say yes.
Before applying, make sure you understand the requirements for approval. This way, you don’t waste your time applying for accounts you’re not eligible to receive. This can result in an unnecessary credit inquiry.
3. Find a bank that doesn’t conduct a credit check
Some secured credit cards don’t require a credit check. But again, you’ll need to do your research and compare the requirements of different banks.
If a bank doesn’t require a credit check, expect to pay an extremely high interest rate or annual fee
To avoid high interest charges, don’t carry a balance from month-to-month and pay off your account in full each month.
4. Use a credit builder loan
If you can’t get a secured credit card, maybe you’re eligible for a credit builder loan.
These loans serve the same purpose. But rather than getting a credit card, you’ll receive a small loan of $500 or $1,000.
As you pay back the loan on time, the bank reports this positive activity to the credit bureaus.
If you get a credit builder loan, you’ll likely need to pledge some sort of collateral. Be mindful that these loans also feature a higher interest rate.
Rather than spend the money you receive from the loan, put it in an interest-bearing account. Slowly pay back the bank over time.
5. Become an authorized user
Talk with your parents, spouse, or a sibling and ask to be added as an authorized user on one of their credit cards.
As an authorized user, you’ll receive a credit card in your name. This account will also appear on your credit history.
To protect yourself, the primary account holder should have excellent credit and know how to manage credit responsibly.
Since you’re not the primary account holder, you’re not responsible for the monthly payments. If this person defaults or pays the credit card late, this can have a negative effect on your credit file.
6. Get a cosigner
It might be easier to qualify for a credit builder loan or a secured credit card if you add a cosigner to the application.
To help your approval odds, this person should also have a good credit history. Understand that the way you manage this credit card has an impact on your cosigner.
The account will appear on their credit report, and they become responsible for the credit card if you don’t repay the balance.
Takeaway
Getting a secured credit card can help reverse a bad credit history or help you establish credit.
But getting your hands on a card is sometimes easier said than done.
Rejections are rare.
However, these can happen if you don’t meet a bank’s minimum requirements. So do your homework.
If you are denied a secured credit card, don’t give up. You might have to consider other alternatives like applying with a smaller bank or getting help from someone who has good credit.
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