Understanding secured credit cards and how interest is calculated when rebuilding your credit history

Published Monday, June 1, 2009 @ 10:42 am

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Filing bankruptcy is all about getting back to your feet, socially and financially. When it’s time to start rebuilding your credit history, one of the best ways to do so is through the use of a secured credit card.

A secured credit card is just like a regular credit card. The only difference is that instead of the bank granting you credit, your credit line is based on an actual cash deposit you put into a savings account. This way, you have all the benefits of a traditional credit card and reap the benefits of a new, maturing credit history.

While it’s important to select a card that has what you need and will overlap with your spending habits, for a person looking to rebuild their credit worthiness, it is critical that your first card have:

A 25-day grace period

It was typical at one time for creditors to offer 30-day grace periods, which meant you would receive one bill every month. Recently, the grace period was reduced to 25 days, translating into 14 bills per year. Many now have gone a step further to a 20-day grace period, meaning 18 bills per year. Since so many of us plan our credit card payment based on a monthly cycle, like all other bills, it is very understandable that when faced with 18 bills a year, a person can get behind on payments.

The best possible interest rate

It helps to understand how credit cards calculate their interest rates.

A flat interest rate is as straightforward as it sounds but they can be fairly high, like 17 to 21 percent. Sometimes, a flat rate is only temporary or can increase after a specified time period so make sure to read the small type. The federal discount rate plus a set flat rate means that the card is based on the “primary credit rate,” which is the rate at which the Federal Reserve charges your bank and can be found in the Wall Street Journal online or in the paper’s “C” section. The added set flat rate is just that, a flat rate added to the primary credit rate.

Prime rate plus a set flat rate adds a flat rate to the rate that the nation’s 30 largest banks charge corporations when they borrow money. The “bank prime rate” can also be found in the Wall Street Journal. These rates can get high because the bank rate is often a bit higher than the primary credit rate.

LIBOR, or The London Interbank Offered Rate plus a flat rate is a term you’ve probably seen a bunch of times but never understood. Don’t worry, few people do. This method of charging interest is based on the average rate that the five largest London banks charge other banks. There are a number of different LIBOR rates to make things even more confusing. More often than not, the three month rate is used. You can monitor LIBOR at www.bankrate.com.

So while the terms and acronyms can be confusing and very often misleading, the important lesson in this blog post is that when rebuilding your credit, it is best to select a credit card that has at least a 25-day grace period and the lowest possible interest rate. Keep in mind also, you will receive plenty of unsecured credit offers post-bankruptcy. Be extremely careful with these new lines of credit. Your post-bankruptcy credit habits should be narrowly tailored to safely rebuild your credit- This means keeping a low balance, and paying it off at the end of the month. You can rebuild your credit after a bankruptcy. Talk to an experienced bankruptcy attorney today to find out how.

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