Anyone dealing with lousy credit knows that it takes a lot of hard work to fix it. There are a wide variety of factors that go into determining your credit score. Accounts that are consistently past due or placed into collections can have a significantly negative impact.
You may be one of the millions of Americans trying to repair your credit. One of the best and most important ways to achieving that goal is by opening a secured credit card. It is also a great way to build a credit history.
This is done for a those who do not have enough of one in order to generate an accurate score. There are three major credit reporting bureaus: TransUnion, Equifax, and Experian. They all go by different scoring structures when generating credit scores. The amount of open and active credit card accounts play a large part.
That is why opening a new secured card can help to fix your credit score. This is because it allows potential lenders and creditors to better understand how responsible you are with your credit. Proper use of the card can improve your standing.
Secured cards are also a useful alternative to traditional unsecured cards. They are great for consumers with low credit scores. That is because many those folks likely will not get approved for the latter.
Some of you may have questions about secured credit cards. We are going to answer all of them. Hence, you can make crucial decisions about your credit repair options. Everyone wants a good credit score. This first step can get you there.
How a Secured Credit Card Works
First and foremost, a secured card works exactly like any other typical credit card. You can use it to pay for purchases at all retailers who accept that particular card. Most secured cards are MasterCard or Visa cards. They are no different than a traditional unsecured card in that manner.
Every time you swipe at a point of sale machine or enter your card number into a retailer’s website, the transaction is processed. The amount of that purchase is deducted from the available balance on your card’s credit limit. When your monthly statement comes, you pay off the balance either in part or in full. This is the same way you would with any other credit card.
However, there is a difference between the secured card and the unsecured version. It is that with the former you need to submit a deposit. This money is held by the issuer as a form of collateral. This is done in the event you stop making your payments. Every secured card is different. Issuers have a litany of criteria, fees, and required security deposits. These determine the type of card for which you qualify and the credit limit.
You apply for a secured card in the same way you apply for any other card — except that when the issuer decides to approve you, they are also deciding on how much of a credit limit you will be afforded. From there, you will be asked for the security deposit amount necessary to receive the card. Your limit is typically 50% to 100% of the amount of your security deposit.
Finding the Right Secured Card
There are plenty of secured cards available to consumers. Yet, they are not all the same. Do your research. You are going to want to focus on a number of areas that will make one more attractive than another. Fees are the biggest component. They should be explored, as they can vary from one card to the next.
They include, but are not limited to, application fees, annual fees, and processing fees. Some of these fees are not usually associated with standard unsecured cards. Additionally, the more fees you are forced to pay, the quicker your available credit limit can get reduced.
Interest rates are also of great concern. That is because that can add additional money to your balance. Of course, the whole point of a secured card is to make your payments on time. You do this preferably in full, in order to raise your credit score. Thus, it is important to get a good APR. You also want to remain cognizant of the fact that you really do not want to maintain a balance for any length of time.
The deposit you submit to the issuer is typically put into an interest-bearing savings account. Those funds will remain in that account until such time that you close the card. Also, it is done in the event that you default on what you owe the issuer, or you upgrade to a traditional unsecured card.
Some consumers may decide that going with a debit card can alleviate their lack of a credit card. It is pretty tough to get by without one these days, especially with so much being done online these days. Try shopping at Amazon or making travel reservations without a credit card.
It is simply impossible. This is why having a suitable card is imperative. However, there are differences between a credit card and a debit card. That is because that the latter is connected to a checking account. It does absolutely nothing to help you rebuild your credit.
Debit cards do not require a monthly bill payment since the money comes right out of your bank’s checking account. Those banks do not report your activity to the credit bureaus because there is nothing to report.
You are not using any credit. This is because it is already your money that is being spent. There is a reason the logos for MasterCard or Visa logo are on your debit card. It just allows it to function as a credit card when completing a purchase. Though, there is no credit being utilized. It will do nothing for fixing your credit.
Security Deposit Minimums
You will be asked to submit a security deposit. Many secured cards will require a minimum deposit in order to receive and use the card. The amount you submit will be relative to your credit limit. Thus, you usually have a choice of giving the issuer a minimum deposit or the maximum deposit for a higher credit limit.
You should compare secured credit cards. Consider how much you will be able to deposit. Then, decide on the cards that are right for you based on what they require as a minimum deposit. That will help you narrow your choices down considerably.
Available Credit Limits
Perform a cursory search on all of the secured credit card offers out there. You will find different limits based on creditworthiness. That is in addition to how much you submit for your security deposit.
Some of the cards will require a portion of your potential credit limit or the entire amount in full. Compare the numbers. That can help you narrow down your choices even more. Conversely, you can find cards that ask for just $49 or $99 to get a credit limit of $200 or even more.
When you are deciding on a credit limit, think low. Do not give yourself the opportunity to get in over your head by having a higher limit. Staying low lets you maintain a good credit utilization ratio. Also, it keeps the monthly bills manageable. In turn, you may pay them off in full.
The recommended credit utilization ratio is nothing over 30%. That means with a $200 credit limit you should not have a balance of more than $60. Perhaps you spend more than that at any given time. In that case, you will want to be sure to pay that balance off in full when your statement arrives.
Secured Card Annual Percentage Rate (APR)
As we mentioned previously, your APR can really cut into your available balance. Plus, it can threaten your credit utilization ratio. This rate is the amount of interest will be added to any balance that remains on your card, after your grace period for payment expires.
Keeping a balance on the card will not be detrimental to your credit. That is true as long as you keep it within the proper utilization ratio, and you do not let it linger on for too long. Otherwise, your interest payments will continue to increase. That can lead to a balance that balloons out of control.
Accordingly, when you are searching for the right secured card, the APR should play a large part in your decision. By their design, secured cards will typically have higher APR’s than those you may find on unsecured cards.
That is why comparison shopping is so crucial in this area. You are certainly going to intend on paying off your balance in full each month. Hence, having a lower APR will definitely be of great benefit to you. You may be unable to pay it all down one month. You do not want to get gouged for it either.
The whole point of getting approved for a secured credit card is to rebuild your credit. You can’t do that if the credit reporting bureaus do not receive the necessary data to raise your credit score.
There is one consequential aspect of your search for the right card. It has to do with the frequency in which the issuer reports your credit use to the bureaus. However, there are some things to be careful about when trying to determine if your payment will be reported.
First of all, be sure that the card you are applying for will report on a regular basis. It is typically a monthly reporting of your credit use. Any card that does not report to the three bureaus is not going to do you any good. You may as well avoid the hassle and the hard inquiry. You should go with a debit card instead.
You are trying to fix your credit. Thus, it is absolutely essential that the card you select will be reported. Make sure that your issuer reports to the major bureaus: TransUnion, Equifax, and Experian.
They are the major reporting bureaus that potential lenders and creditors turn to when pulling your credit report. They do this for the purposes of making a decision to approve or deny you for a loan, or even an apartment.
When you do apply, a hard inquiry will be reflected on your report. This is an application for credit. Thus, the inquiry can have an impact on your credit score. It can potentially lower it by 20 points.
Do not worry. The inquiry is typically removed from your report after a period of two years. Those 20 points you lost can be easily regained with consistent, responsible use of your new card.
Let us say that the issuer reports to the three bureaus on a routine basis. Also, you have shown positive behavior with your credit. Thusly, your score can rise significantly in just six months.
There is another thing you want to take into consideration when choosing a card. It is the reputation of the issuing bank or company offering that card. Consumers who are looking for a secured card are already at a disadvantage due to their poor credit or little to no credit.
That makes them primary subjects for getting scammed by disreputable organizations. They offer secured cards with incredibly high rates and fees that are nothing short of usury. It is a buyer beware situation where consumers need to take into account the kind of deal that is being offered.
Sometimes it can be too good to be true. That is because it is. In other cases, the high rates and fees are a way for bad actors to get their hands on your money. They provide little to nothing in return.
They may promise to report your payment history. They charge you even higher fees. Plus, they may surprise you with additional costs after you have signed on for the card. They know full well that closing the card down can impact your credit negatively. This would make the situation worse for you. Therefore, to avoid that from happening, you must pay the extra fees.
There are many different consumer reporting sites online. This is where you can investigate the reputation of an issuing company or bank. See what the reviews say. Try to find out if any formal complaints have been lodged against an issuer. It is better to take these steps now. You don’t want to deal with getting scammed later on.
Making Your Payments
This is where things sometimes get a little confusing for consumers who have applied and been approved for a secured credit card. They submit their security deposit of $49 or $99 or $400. They begin using their card like normal.
However, what they do not fully grasp is the fact that their security deposit is just that. It is a deposit. The money is put aside and applied to your balance in the event you default. You are the cardholder. It is your responsibility to avoid that from happening. Do that by paying off your balance on the due date on your monthly statement.
Failing to make your payments in a timely manner or neglecting to make a payment entirely will be reported to the bureaus. It will negatively impact your score. The money you submitted is not supposed to be applied to your balance.
You are supposed to make your payments. It is only put toward what you owe in the event you default on your balance by missing multiple payments. If that happens, the card will be shut down.
It will be reflected on your credit report as having been closed by the issuer for missed payments. You will lose your security deposit. Plus, you have just made it exponentially more difficult to rebuild your credit. In fact, you’ve just made it worse.
Should You Get a Secured Credit Card?
That depends on you. For most consumers, a secured card is a smart way to rebuild credit. It is when getting an unsecured card just is not feasible. Getting approved for a secured card is typically easier even with less than great credit.
Once you have the card, you are basically given a second chance. Your goal is demonstrating positive and responsible behavior with credit use. Us it for a long time. Make your payments on time. You are then more likely to possibly get approved for a traditional unsecured version.
Secured cards are not just for people with bad credit. There are many consumers with very good credit who also apply for a secured card. However, even with good credit, it can be tough to get approved for a higher credit limit.
A secured card can afford those consumers with the opportunity to get a card with a high limit around $10,000. They can establish a proven track record with such a high balance. Thus, it becomes easier to get approved for a high limit on an unsecured card.
Once you have the card, you must be very diligent not to overspend and take on more debt. This is a second chance for those of you with poor credit. You should treat it as such. Be sure that you are making your payments on time. Keep the credit utilization ratio low. Ensure that your issuer is reporting your payment history on a routine basis.
Focus on small purchases only. Make transactions that will not add up. These can be paid off in a timely manner when the bill is due. You may want to put one low monthly recurring payment on the card. This could be your Netflix subscription or your gas bill. In turn, the card is always showing activity without taking on a large bill to pay off. This will help you re-establish your good credit.
Adopt these good practices and your score will continue to rise. Before long, your credit history will reflect your responsible behavior. You will be considered less of a risk to lenders and creditors.
Upgrading to an Unsecured Card
Accumulate 12 to 18 months of positive reporting and responsible credit use. Then, your issuer will review your account. They may offer to convert it over to an unsecured credit card.
Congratulations, you have reached your goal of rebuilding your credit. At this point, your issuer will return the security deposit to you, with the earned interest included. You can continue using the card as you have been all this time.
Do not worry if your current issuer does not offer to convert your secured card to an unsecured version. You may still have a credit history. Now it is strong enough to get approval for an unsecured card with a different issuer.
Be careful about when you apply for that new card. Make sure you have established a credit history with your current card. It needs to be long enough to affect your score in a positive manner.
Perhaps you attempt to get an unsecured card and are still denied. In that case, you will need to wait longer to get that unsecured card. That is okay. Continue practicing good credit use by paying your bill on time and minding your utilization.
Give it another six months and then try again. Conversely, the next time you apply, be sure you can get approved. Otherwise, your credit score could be negatively affected by the number of times you have applied. If you are denied, you will be sent a letter describing why. That information can be helpful in your next attempt further down the line.
Our Final Thoughts
We hope this has cleared up all of your questions about secured credit cards. Credit use and reporting can be confusing and frustrating. Therefore, having the knowledge to navigate through it all is the key to success.
Consumers who have poor credit are not without hope. Getting a secured credit card is an easy and useful part of the process. It can lead to greater credit scores down the line.
It won’t happen overnight. Be sure you are dedicated to improving your score and are willing to work at it. Then, you can fix your credit. In turn, you will get approved the next time you apply for a credit card, a loan, or anything else.