If you have been rebuilding your credit by using a secured credit card, sooner or later the bank will return your deposit to you when it has ascertained that you are a good credit risk for the amount of your current total credit limit. These deposit returns are a normal part of the process and you should view them as a welcome step toward your eventual financial health recovery.
If you have never taken out a secured credit card before but are thinking about doing so, here is what you can expect.
The Bank Requires That You Deposit An Amount Equal to Your Desired Credit Limit
If you want a $1,000 credit limit then you have to deposit $1,000. In my experience most people start out with a smaller limit/deposit, usually around $200-400. The money you give the bank is placed in a savings account. Some banks may pay you interest on the deposit; other banks may keep the interest for themselves. Don’t worry about whether your deposit is earning interest because it won’t affect your total credit anyway.
That deposit secures the bank’s risk in extending credit to you. In other words, if you start to miss payments and the bank concludes that you are unable to pay for any purchases you make on the secured credit card, it will close your card account, apply your deposit toward the outstanding balance on the card, and return whatever remains to you.
Although this is not a good outcome you, at least, are assured that your debt will be paid and you won’t have to worry about the bank pursuing you.
The Bank Wants You to Use the Credit Card
Merely having a secured credit card is not sufficient to rebuild your credit history. You need to use that card a little bit each month and make prompt payments when the bills come due. This is so that the bank will note on your credit reports that you pay on time.
Having a recent history of prompt payment improves your credit rating and future lenders will see that you have re-established a track record of being a good credit customer.
The bank also wants to make sure that you can manage your credit responsibly. If you can’t keep up payments on a secured credit card then you are not ready for an unsecured credit card, where the bank assumes all the risk.
After a year or so, the bank will review your activity on the credit card. If you have been using the card regularly and paying off the balance (or at least making minimum payments without trouble) the bank may, at its discretion, refund your deposit to you.
This means you now have an unsecured credit card.
What You Can Do with the Refunded Deposit from a Secured Credit Card
It may only be a few hundred dollars but your refunded deposit may be an unexpected windfall. If you have been living on a budget and paying down bills it may make sense to use that deposit to pay down some other credit accounts. Start with the smallest credit balance first, such as a store card or a small credit card.
However, if you’re not sure about your income over the next few months — such as when you hear rumors about possible layoffs — it may make better sense to stash that refunded deposit into a savings account. Although you will pay more in interest on your loans and other credit accounts than your savings account earns, you will have the flexibility of retaining an emergency cash reserve.
You should not spend this money on trips, new furniture, pampering, electronics, dining out, etc. Stick to your budget. That is the most important thing: stick to the personal commitment you have made to yourself.
If you feel the temptation to spend the money is too strong then it will be better to use it to pay down balances on other credit cards or loans.
You might also consider making small investments for yourself with the money. The idea is to get that money off the table and out of your sight as quickly as possible. If you use the money to make regular budgeted payments you’ll deceive yourself into thinking you can use your paycheck for something else.
Financial Discipline is Most Important When You Receive Unexpected Money
Although it is important to remain disciplined when you’re living on a hardship budget, it’s even more important to stay disciplined when you suddenly receive an infusion of cash. Whether you are receiving a refunded deposit from a secured credit card, inheriting money, winning the lottery, or earning a bonus from work that extra money threatens to disrupt your monthly budget.
Once you start spending outside your budget it is hard to stop. You need to remind yourself that you are living on a budget for a reason. If you didn’t budget for the financial windfall at least two years in advance then you are not ready to spend that money.
In other words, living on a budget is not just about knowing when to pay your bills. It’s also about knowing when you can or should spend money. If you have an emergency, a real emergency, then you can spend any extra cash you have on hand. But if there is no emergency then there is no reason to spend more money than you have already budgeted.
The biggest mistake people make with money is spending it all. No matter how much money you have or earn, the secret to financial success is to spend less than bring home. It doesn’t matter where the money comes from. The easiest way to protect yourself from unnecessary spending is to never look outside your budget.
If you need to change your monthly cash distribution then change the budget. But don’t ever spend a non-emergency penny that is not already accounted for in your regular budget.