Last week, I posted an article hoping to get people to break free from the stigma of filing for bankruptcy. It’s a decision I support under the right circumstances. Oftentimes when someone who is in the position of wondering what to do, there’s a number of reasons to consider whether or not you end up filing for bankruptcy.
In any case, let’s assume that you’ve made your decision. You are now looked upon unfavourably with the credit companies, but you want to buy a car or maybe a home… what can you do?
What’s the Problem?
Most people don’t have the money on hand to make those major purchases. So in order to get ahead, they take on debt in the form of capital that’s been paid upfront from a credit company. The only contingency is that the money be paid back with interest. Thus, we have credit. When we’re unable to consistently pay the creditors, our credit rating suffers, which means our ability to get more credit suffers.
What’s the Solution?
Let’s assume that your credit has hit rock bottom from a bankruptcy. You still want to buy that dream home of yours and sooner, rather than later. After a bankruptcy however, no lender will give you the money to buy that home. While we can’t have the instant gratification of having the house this instant, we can shorten the time with which that happens.
A secured credit card has become a very popular product in the last few years. With bankruptcies at an all time high, people were looking for a way to quickly rebuild their credit. Hopefully, it wasn’t so they could go on a spending spree again.
How Does It Work?
The way it works is similar to a normal credit card. The difference being that instead of the lender risking the money upfront, you do. This means that you’re putting your own money upfront to set the limit of the credit card. So in fact, it’s not credit at all. You use it in the same way, but since it’s your own money, the purpose isn’t to make purchases before you have the money; it’s purely to help rebuild your credit.
When Is This a Good Option?
While the benefits of being able to build up your credit are appealing, this isn’t an option I would recommend for everyone. The typical high fees that come along with these products could potentially put you right back where you started. The biggest consideration I would make is the reason you got into a bad credit position to begin with. To pay the fees involved with a secured credit card and to have undisciplined spending habits, you really wouldn’t be the type of person who should have a credit card in hand to begin with.
Often with bankruptcy comes a new appreciation for proper financial planning and more controlled spending. If the importance of major future purchases is high on your list of priorities, you may be out of luck in the short term. But with the new appreciation for saving, a secured credit card can be an excellent way of getting you on track towards your future goals.
Aaron Koo is a passionate networker and entrepreneur who gets people out of that “someday” mentality about understanding their finances.
Excellent!! This is a very fantastic article. It is extremely concerned me to know how to recreate my credit. I am getting so greatly gossip in your suitable reformation. I am obliging for your fastidious reform.
Thank you for your comment Jason. What is important to you about rebuilding your credit?
As Michael already knows, I believe credit cards are evil. They are an addiction and credit card companies are like casinos.
I have a friend and Karate instructor who came to the US from China when he was 14 with his 6 brothers and parents. They came with just enough cash to purchase a refrigerated truck and had the connections to import from Taiwan and China. They used cash, nothing but cash and have built the 3rd largest small business in Florida. They serve the Asian food market and community from the I-4 corridor to Miami. You name the product they have it.
His warehouse was bought with cash, the land it is on, he owns and bought with cash. He recently purchased a new cigarette speed boat, and if you have been following the theme….he paid CASH.
He has not had a problem ever, he and his family are hard working, and have not bought more than they can afford. That is the key to not being in debt, don’t spend more than you can afford. If you can’t afford it, don’t buy it. That goes for buying a car or a house, don’t have the money then save more to buy what you want, but don’t go out and get credit.
I am very set in my opinion on this. Always have been and you can check previous posts or ask Michael how much I do not bend from this opinion. Aaron, I think it is a well written article, with great points, I believe your last paragraph is the most important and should be pondered by anyone thinking of trying to build a credit rating.
I agree, and I’d like to add that credit, while destructive as it is, can be a powerful financial tool when used properly.
Would be fair to say that that as much onus should be put on the credit company as well as the consumer?
I totally agree with that statement Aaron. In fact I believe the credit card companies have a greater onus to be responsible in offering credit to people already in debt or at risk of becoming a slave to the interest.
Just a thought that I have had since the $700 million bailout of the financial institutions is the waste in where it went. If the US government had sponsored a plan for every taxpayer in the US that owed over $20,000 where the taxpayer had to sign a wavier that they would not get another credit card or apply for a loan for 10 years if their debt was paid off by the bailout money the US would not still be in this recession type economy. We would have people paying cash for things with money that they now had because they no longer had the debt to pay.
Bailing out the financial institutions didn’t solve anything. The people that owed the money still owed it. They had no money to spend in the economy, therefore no stimulation of businesses that hire people, which leads to more people having money to pump back into the economy.
Just my take.
My debate with Ray about credit cards is long and well documented. 🙂
I think “your take” is shared by the vast majority of people, myself included.
I suspect that’s matter of adhering to the system and not the system itself.
Really excellent post! This post is very interesting to read one.
Is this the same as Debit card?
Somewhat. With a debit card, you won’t be building your credit score.
One thing is one of the most popular incentives for utilizing
your card is a cash-back or even rebate provision.
Generally, you’ll have access to 1-5% back on various purchases. Depending on the card, you may get 1% again on most acquisitions, and 5% in return on acquisitions made using convenience stores, filling stations, grocery stores in addition to ‘member
merchants’.