How To Use A Secured Credit Card To Build Credit
How To Use A Secured Credit Card To Build Credit
People who have poor credit get a raw deal when it comes to financial services. Whether it’s because of a bankruptcy, or foreclosure, or excessive credit card debt, bad credit makes everything harder than it was in the first place. For example, once your credit goes bad, your first order of business should be to set out to rebuild it. That’s easier said than done, because very quickly you’ll find yourself in a catch-22: to repair your credit, you need someone to give you credit, but no one will give you credit because you have bad credit. In this situation, what most people do is they go and get a secured credit card.
Read our reviews of the following secured credit card issuers: Capital One MasterCard, Applied Bank Platinum Zero, Bank of America, Citibank.
How secured credit cards work
A secured credit card works exactly like a regular credit card. In fact, when you pull out your card, the only person that will know it’s a secured one is you. Where the secured credit card differs from its unsecured sibling is that in order for you to get it, you have to offer the issuing company a collateral, typically cash. In most cases, the limit on your secured card will be 100% of your deposit (meaning that you get a $500 limit on your card in exchange for a $500 deposit) but that’s not guaranteed.
Once your card is issued, all you have to do is use it responsibly for 6 to 12 months, and you might be eligible for an “upgrade” to an unsecured card. By responsible use, we mean no late payments, and no going over the limit. One of the frequent misconceptions about secured cards is that there are no regular monthly payments to be made, and that if the payments aren’t made, the company will just “take it from the deposit”. That’s not how it works. The collateral is there in case you totally default on your payments. In this case, the banks uses it to pay off your balance and closes the account. Needless to say, this is not exactly what you’re looking for.
How to manage your secured credit card
Now that we’ve established that you have monthly payments to meet, let’s examine how you handle the finer details of your secured card. A lot of people don’t pay too much attention to the interest rate that’s charged on these cards. Well they deserve attention, as they’re rather high. Why do we mention this? Well considering they hover around 22% to 24%, you don’t really want to be carrying a balance, as this can get really expensive really quickly, and possibly get out of hand before you know it.
Secured credit cards usually have fees that regular credit cards do not. These fees includes application fees, processing fees, and annual fees. Beware of cards with high fees because they can greatly reduce your deposit and ultimately, your credit limit. Just because you have bad credit doesn’t mean you can’t shop around to find the best deals in terms of low fees and interest rates.
It’s recommended that you only charge purchases that you would make anyway, so that (and this is very important) you pay off your balance every month, so as to avoid interest charges. Do not use your card to incur debt: if you can’t afford a purchase, don’t charge it. A very important point to be made at this point is that you need to make sure that your good behavior is reported to all three credit bureaus, because this is ultimately why you’re getting the card: to rebuild your credit and increase your credit scores.
Going from unsecured to secured credit
As mentioned above, after at least six months of good behavior (but typically 12 months), you can apply to have the collateral requirement waived, which effectively turns your card into an unsecured credit card. Even if your request for conversion is decliend, you can always apply at another company, since they will be able to see the positive credit history you’ve accumulated. Just don’t apply for several credit cards if you can’t get accepted, all this will do is make you look desperate. Just give yourself a 3 to 6 month break and try again.