"Diane" called into a Los Angeles radio show recently to ask what she could do to rebuild her credit. She had taken the usual advice to apply for a secured credit card but had been turned down -- twice.
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"What do I do now?" she asked.
Banks Balance Risk with Profit
Secured credit cards don't seem to involve much risk, at least for the banks issuing them. The borrower has to send in a cash deposit equal to the credit card's limit.
But banks are in business to make money, and it can be hard to make money with secured cards, says credit scoring expert John Ulzheimer. That's because of the low credit limits involved -- a typical limit is about $500 -- and the high probability of default because of applicants' past credit troubles.
"It's still a credit-risk issue," Ulzheimer says. "You may be so risky it's not worth their time."
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If You're Turned Down, Don't Give Up
You shouldn't let a rejection make you think you can't get any card, however. Each issuer has different policies to sort out the people who may turn into good future customers from those who won't get their act together, says Dan Ray, editor in chief of CreditCards.com.
"Card issuers want to build long-term, profitable relations with customers, and may, by policy, prefer to dispense secured cards only to someone starting out, with no credit history, rather than give someone a second or third chance," Ray says. "So don't take it too personally (if you get rejected). They're not turning down only you, they're turning down everyone like you."
Why Banks Reject Secured Card Applicants
Issuer policies vary, but many issuers won't approve an application if the would-be borrower filed bankruptcy recently, has open collection accounts or current delinquencies. The applicant's history with the issuing bank also could prompt a rejection. If you've defaulted on a previous loan or credit card with the bank, it may not give you another chance.
What to Do If You are Turned Down
If you apply and are turned down, the issuer is supposed to tell you exactly why, which can help you determine what problem or problems you need to fix. You'd be smart to do some footwork before you apply, however. You can reduce the chances of being rejected by carefully reading the application first so you can spot the issuer's red flags. Also, take care of any active collection accounts before you apply, Ray says.
"Negotiate a settlement or come up with a payment plan, and make sure it no longer shows on your credit report as an account in collections," he says.
If you still get denied, you have options.
- A "no credit check" card: Some cards have no credit check but still report to all three major credit bureaus, so look for one to help build your scores.
- A share secured loan: Some credit unions offer these loans, which are similar to secured cards. Members deposit money in a savings account and are allowed to borrow up to 100 percent of the balance, to be repaid over time.
- Credit builder loans: These loans may be similar to share secured loans or they may be set up so that the amount you pay back is put into a savings account for you to claim at the end of the loan. Look for them at credit unions, community banks and community development financial institutions.
Copyright 2014, Bankrate Inc.