How To Build Credit With A Secured Credit Card
When you have bad credit, you can be in quite a pinch. You need a credit account or a loan of some type, in order to start rebuilding your credit. But at the same time, it is extremely difficult to get any kind of loan when you have a poor credit score.
Thankfully, there is a special type of credit card that is offered to nearly anyone, regardless of your credit history. Secured credit cards allow you to rebuild your credit while enjoying all of the security and convenience of a standard, unsecured credit card.
How secured cards work
To be approved for most secured cards, you must be able to prove your identity, and have any bankruptcy proceedings already discharged. Before you can open a secured card account, you must submit a refundable deposit. Most of the time, the amount of your deposit becomes your credit limit.
But once your account is opened, your secured card will work much like any standard, unsecured card. You will receive a statement every month that reflects your charges. And you will have to make at least the minimum payment before the due date, as your security deposit is simply meant to reduce the card issuer’s risk, not to be drawn upon for payment. If you choose to carry a balance, you will incur interest charges at the standard rate for that card.
Otherwise, the card can be used at any merchant that is part of the payment network. In fact, no one will know that you are using a secured card. Furthermore, a secured card can offer you many of the same cardholder benefits that you can receive from a standard, unsecured card. For example, there are secured cards that offer rental car insurance, damage and theft protection policies, as well as extended warranty coverage. There are even secured cards available that offer rewards for your spending.
Building credit with a secured card
Secured cards are also viewed by the major consumer credit bureaus just like standard, unsecured cards. With most cards, each statement is reported to the three major consumer credit bureaus, along with your payment history. When you make on-time payments with your secured card, it will add to your positive credit history and increase your credit score.
After making a year of on-time payments, many secured card users are able to qualify for a standard, unsecured credit card. Once you have a standard credit card, you can close your secured card account, and receive a refund of your security deposit.
Tips for using a secured card to improve your credit:
1. Always make every payment on-time. One of the most important factors in your credit score and your credit history is your payment history. When you make all your secured card payments on-time, your credit score will rise as you prove your trustworthiness. However, if you miss payments, your credit score can remain poor.
To ensure you make all of your payments on-time, you can configure email and text reminders of your payment due date. You can also configure automatic monthly payments from your checking account.
2. Keep a very low level of debt. Another extremely important factor in your credit score and credit history is your level of debt. Even though your card is secured with a refundable deposit, each month’s statement balance is reported to the three major consumer credit bureaus as debt. By keeping a very low level of debt, you will show you are using your credit cards responsibly.
3. Try not to carry a balance. When you fail to pay your entire month’s statement balance in full, you will incur costly interest charges. By paying each month’s statement balance, you can avoid interest charges and keep a low level of debt. And once you graduate from a secured card to a standard, unsecured credit card, you will always save money by maintaining this habit of paying off your credit cards each month.
4. Watch your credit score. Many credit cards, including secured cards, now offer all cardholders a free monthly credit score. You should take advantage of this feature by monitoring your credit every month. This will help give you encouragement and a sense of accomplishment as your credit score rises. And if your score drops unexpectedly, you can find out what caused it and make sure it doesn’t happen again. Like so many things in life, the sooner you fix the problem, the less damage it will do.
Just because you have a low credit score now, it doesn’t mean you can’t improve it. By opening up a secured card account, and managing it responsibly, you can watch your credit score rise faster than you might have thought possible.
About Jason Steele
Jason Steele is freelance journalist and an expert on the credit card industry. He contributes to several of the top personal finance sites, and his work is syndicated to mainstream outlets such as MSN Money, Yahoo! Finance, and Business Insider.