Bucks: Secured Credit Cards: Not Everyone Qualifies

If your credit was ruined during the Great Recession, using a secured credit card may be a good way to help improve your standing.

That is, if you can get a secured card.

Not everyone may be immediately eligible, especially if you have a recent bankruptcy on your record. A reader who recently emerged from bankruptcy wrote to me after she and her husband were denied secured credit cards from Citibank. That, at least in my mind, raised several questions: Are all people emerging from bankruptcy unable to get a secured card? Are there other situations where you’re likely to be denied? And is the passage of time the only option for the millions of people whose credit has been ruined during the recession?

Secured credit cards appear to pose minimal risk to the card issuer. After all, the cardholder is required to put a certain amount of money into a bank account, say $250 or $500, which is used as collateral. And the available amount of credit is often equivalent to the amount on deposit. By using these cards strategically, a person with bad credit can speed up the recovery process by demonstrating positive behavior: charging only small amounts and paying off their balance each month.

“You need to dilute the negative information on your credit report, and there is no better way to do that than with a secured card,” said Odysseas Papadimitriou, chief executive of CardHub.com, a credit card comparison site. He said he believes getting denied for these cards are the exception rather than the rule. But he did say that some banks want to be sure that the bankruptcy is well behind the applicant, and, in some cases, penalize them a bit for getting into trouble.

So to clarify who is actually eligible for these cards, I called several issuers of secured credit cards and asked them about their approval policies. Some were more forthcoming than others, but here’s what they said:

Citibank. It depends on the individual’s situation, said Sean Kevelighan, a Citi spokesman. He declined to disclose the factors that it considers when making credit decisions.

(The Bucks’ reader said the bank refunded her and her husband’s secured deposit, totaling $1,000, and said it could not accept their application because “a credit obligation related to a bankruptcy or financial counseling plan was recorded on your credit bureau report.” The reader said they had applied for the card about 10 months after their debts were discharged in bankruptcy, though they continued to pay their student loans, mortgage and auto loans during the six-month bankruptcy period. Her husband has been self-employed since January 2010, though she is not working. Citi looked into the situation at our request, but declined to say why the couple was denied.)

HSBC. Applicants who provide a security deposit get approved, unless a background check with the credit bureaus turns up a discrepancy related to the identity of the applicant. Recent bankruptcies do not make you ineligible, and credit scores are not a factor in the company’s decision.

Capital One. If the courts have discharged your debts, an applicant would be immediately eligible for a secured card. Capital One also considers the applicant’s ability to repay. “Our goal is to provide reasonable access to credit with the appropriate guardrails in place,” said Sukhi Sahni, a spokeswoman for Capital One.

Bank of America. Generally speaking, applicants must be out of bankruptcy for a year, and must have another relationship with the bank, like a checking account. Delinquencies on other accounts are also likely to result in a denial. “Over time, we would want to see that they demonstrate the ability to manage their finances responsibly because ultimately the goal is to graduate them to a nonsecured card,” said Betty Riess, a spokeswoman for Bank of America.

Wells Fargo. Applicants must be out of bankruptcy for a year. The bank also looks at a variety of other factors, including FICO credit scores and payment history. Wells Fargo only issues credit cards to current bank customers as a general policy.

U.S. Bank. The bank declined to comment.