Credit Card Applications: After Three, Think Security

by John Kiernan on November 23, 2010

New Credit CardsI recently got a call from a college friend who wanted advice on how to get approved for the best credit card possible . He said he had applied and applied but for some reason had still not been given use of a single card. What should he do differently, he wondered, when applying for cards in the future?

My advice to him: immediately stop applying and open a secured credit card because it provides both guaranteed approval and a safe way to rebuild credit.

You see, my friend’s credit had not been great to begin with. He racked up high credit card charges during his freshman year and had difficulty paying them off. While he eventually recovered and has since become debt free, some residual credit damage still existed when he first sought a new credit card. Still, he felt that his credit was pretty good on the whole and that he could eventually get approved for the right card if he simply applied enough times.

This approach, however, turned out to be exactly wrong because frequent application for credit cards signals both financial instability and desperateness to lenders and eventually leads to a lowered credit score. Thus, as my friend kept applying, his credit score kept falling, and the very plan he employed to obtain a credit card, in effect, kept him from getting one.

If he had contacted me earlier, I would have instructed him to apply for a credit card for which he had a realistic chance of approval. If he had not gotten one after three applications, I would have given him the same advice that I did after his application spree: get a secured card .

Secured credit cards provide guaranteed approval because they require that a refundable security deposit be placed when they are opened. This security deposit protects issuers against default, thereby allowing them to give cards to any type of consumer, irrespective of credit standing. It also eliminates the need for an expensive fee structure for secured cards. Thus, they provide relatively cheap options for people who are having trouble garnering approval for general cards.

“Ok,” my friend responded to my advice, “I’ll get a secured card, but which one?”

“That’s a great question,” I said. “Do you plan on using it to make purchases?”

While this may sound like a stupid question and many people might think that a credit card would, of course, be used to make purchases, this is not always the case. Often, someone wishing to rebuild his or her credit will simply open a credit card account and lock the card away because just maintaining a credit card in good standing and at zero balance will send positive information to credit reports each month. People often wish to take this route when they have had trouble with credit cards in the past or when they do not trust themselves to practice disciplined spending. In this case, one of the best secured credit cards to use is the Public Savings Bank Classic Secured Visa® Credit Card which has no annual fee and requires only a one-time set-up fee of $75.

However, my friend needed a credit card with which to make regular purchases. Thus, I suggested he get an Orchard Bank Secured Credit Card because it charges no first year annual fee and offers a 7.9% APR. He ultimately followed my advice, got the Orchard card and is well on his way to improving his credit.

Still, even if you do not require credit improvement, you may want to acquire a secured credit card to use, oddly enough, as a savings account. The Citi® Secured MasterCard® Credit Card provides a 4% interest rate on its security deposit over 18 months, which is around 20 times higher than the national average of 0.21 percent. Thus, given the fact that this card’s security deposit can be as high as $5,000, using it as a savings account could be rewarding.

Ultimately, doing your homework before applying for a credit card is advisable. If my friend had done his he would have known not to apply en masse and would not have damaged his credit score so significantly. Still, if you find yourself in a position similar to his and you cannot seem to get approved for a general credit card, simply get a secured card, because the money for its security deposit is all the approval you will need.

Disclosure: Some of the links within this article point to CardHub.com, which is owned by the same parent company as Wallet Blog.

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