One way to build a credit history, or re-build it if you’ve had some financial problems in the past, is to use a secured credit card. There are millions of people who use them every day, even people who haven’t had any credit issues before. Building up a good credit history is a smart move for everyone.
What is a Secured Credit Card?
Banks issuing secured credit cards will set a limit on the amount of credit they give to you. In exchange for giving you credit, they will ask you to make a deposit into an escrow account as security or collateral. Generally, the credit limit on your new card will be half of what you have deposited. For example, if you make a security deposit of $1000, your credit limit, or what you can charge on the card, will be half-to-all of that amount.
A secured credit card works like any other credit card. It works at retail shops, gas stations and for making on-line purchases. Secured credit cards just function differently from regular credit cards “behind-the-scene.” When you are out and about shopping, you will be the only know who knows that you’re using a secured card. Merchants readily accept both types of cards without causing you any embarrassment.
Why Would You Want One?
This credit card helps you build up a good credit history if you’ve never had credit before, or you need to rebuild your credit rating. If you’ve gone through some difficult times and now have a lower credit rating than in the past, a secured credit card will help you move forward and increase your credit score. This kind of card gives you the second chance that you deserve.
You will have the chance to show the credit card company that you can make your payments on-time and in-full each month.
Using it helps you demonstrate that you are responsible with money, specifically, a line of credit. You will have the chance to show the credit card company that you can make your payments on-time and in-full each month. Paying the balance in full each month shows that you can live within your budget and confine your purchases to what you can afford. Here’s what you need to do:
- Apply for one of the secured credit cards that we recommend for rebuilding credit
- Wait for approval and notification of how much you need to deposit in advance, usually double of what your credit limit will be
- Make the required security deposit into an account held by the bank issuing the card
- You’ll receive the card in the mail and can begin using it immediately to start rebuilding your life
What Should You Look for When Choosing a Secured Credit Card?
Be aware that some credit card companies charge higher fees for secured cards than they do for regular cards. Look carefully at the processing fees, application fees, annual fees, increasing-credit-limit fees because these the bank will usually take these fees from the funds you deposited. These extra fees reduce your deposit amount and your credit limit. Look for low fees on cards and low interest rates.
You should also compare the APR for each card. The APR is a number that tells you what the real cost of using a particular card is. It includes more than just the interest rate on the card. It factors in all of the fees and costs if you use this card. It is a good way to compare the benefits of one card to another.
Finally, pay attention to the billing cycle and when you must make your payments. Inquire about setting up automatic payments right away so that you don’t incur huge penalties for making a late payment. A payment a day late carries the same penalty as one that is five days late. However, the interest may be more for each day you are late with your payment.
How Do You Use Your Secured Credit Card Responsibly and Build Up Your Credit Score?
Always keep this in mind: If you can’t afford to pay cash in the first place, then don’t buy it on a credit card. If you can afford it, then set aside cash in the exact amount of your purchase so that you can pay the monthly statement as soon as you receive it. Make sure to do the following:
- Pay your balance on time
- Pay your balance in full
- Get a card that reports your good and responsible habits to one or all three major credit bureaus. If none of your on-time or full-payments show up on your credit record, then you can’t improve your credit rating. You won’t have any credit history for lenders and banks to actually see if the credit card company does not report your progress.
- Don’t use the card to create new debt. Use the card only to purchase items that you would normally be able to afford to pay for in cash—things that are already in your budget, not new purchases. Use the secured card only for small purchases to show that you can repay the balance on time and in full.
How Long Will It Be Before You Can Get a Regular Card?
About one or two years later, many credit card companies will offer an unsecured card to you if you have made your payments on time and paid off your monthly balances. You may receive an offer from your current secured-credit-card company or a different company.
You are free to apply to any company offering unsecured credit cards. However, if one company denies your application for credit, do not make any more applications to other companies. When you make an application for a credit card and it is denied, the denial can adversely affect your credit rating, making your last year or two of good, responsible behavior worthless.
Continue to make timely and full payments each month on your existing card.
That’s a harsh penalty after the hard work you just did trying to prove how responsible you are. Think carefully about applying with other companies. It is best to wait for your own credit card company to offer a new credit card to you or have them offer to convert your secured card to an unsecured card automatically.
If you do happen to apply with another company denies your application, you should keep your current, secured, credit card. The credit card company that denied you will send a letter to you explaining why it denied your application. The reason the company lists in the letter can help you decide what to do to try to correct the problem going forward.
Continue to make timely and full payments each month on your existing card. After about six-to-twelve months, you can consider reapplying for an unsecured card again.
When current credit card company may offer to “convert” your current secured credit card, into an unsecured credit card after one or two years, you will have a “regular” credit card and will no longer have to provide an advance security deposit. When you reach this point, you will deserve a round of applause for your hard work. You will have improved your credit score and proven your creditworthiness. Congratulations!