The dilemma: a credit card is the quickest way to build credit, but it’s nearly impossible to get a credit card without established and/or good credit.
If you’re trying to build credit or improve it, a secured credit card is one of the best tools to help you achieve that goal.
What is a secured credit card?
A secured credit card works the same as a traditional unsecured credit card, with one major distinction…a secured card requires a security deposit to use as collateral.
This deposit can be as low as $200 or $300 and is usually equal to your chosen credit limit. The credit card issuer holds onto the deposit in case you default on your payments.
What happens to that $300 deposit if you always pay your bill on time? You’ll eventually get it back. Use the card responsibly, and you can improve your credit enough to qualify for an unsecured card — one that doesn’t require a deposit.
How To Use It
Although they require a deposit, secured credit cards are a powerful tool for rebuilding credit. Most importantly, use the card carefully, making a few purchases every month – don’t go too close to your credit limit.
A generally accepted directive is to use less than 30% of your credit line each month.
When you keep your card balance at a reasonable level, it demonstrates to creditors that you are not relying solely on credit to meet your obligations.
Pay your balance in full (or just slightly short of it) every month before the due date. When you pay in full, you won’t be charged interest. Interest rates on secured cards are generally higher than those on unsecured cards.
Keep an eye on your credit score over time using a free service like Credit Karma; when it has meaningfully improved, ask your issuer about upgrading to an unsecured card
As you use a secured credit card regularly and make your payments on time (or even early) every month, you establish better and better credit through your payment history.
Key Tips to Follow
Make Sure It Will Help
Some secured cards don’t report your account activity to all three major credit bureaus. This means that even if you use the card responsibly, it may not help you build your credit history. Make sure that the card you choose reports to the credit bureaus.
Consider the Issuer
Some of the major credit card issuers offer secured credit cards, but most secured cards are issued by banks and credit unions you may not recognize. That’s fine, but do your research to make sure the issuer is reputable and offers a good customer experience.
Look Out for Fees
Some secured credit cards charge an annual fee and other fees. Others, however, won’t charge you a fee unless you take out a cash advance or request balance transfers.
“The score doesn’t look at a secured card any differently than an unsecured card,” said Barry Paperno, a credit score expert who has worked with FICO and Experian.
“It will look at the fact it’s a credit card, when the card was opened, the credit limit and the balance, and of course the payment history. In that way it will help establish credit just like an unsecured card.”
With the right secured credit card, you will have the benefit of being able to add positive payment history to your credit report. Consider a secured credit card as a stepping-stone to qualifying for a better credit card in the future. Please reach out to me for more, as it would be my pleasure to work with you in building your credit.
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