How to Build Credit With a Secured Credit Card No matter how well-meaning someone is when it comes to their credit scores or financial stability.
Job loss, reduced income, and unexpected medical conditions can make it difficult, if not impossible, to pay bills. Regretfully, your credit scores are frequently the ones that suffer the most throughout the darkest periods of your life.
Unfortunately, bad credit can have a cascading effect on your finances. Having a low credit score usually implies that you will either be refused a loan entirely or pay a high-interest rate when you borrow money.
Even worse, you can lose out on your ideal employment or have to pay more for insurance. You might even be unable to obtain new credit that could help you rebuild your credit because of your past credit history.
However, if you’re prepared to put in some effort to gradually improve your credit, there is good news. You can repair your credit history and demonstrate your responsible credit usage with a secured credit card. Even better, no matter how terrible your credit is, you can generally get accepted for one.
What is a secured credit card?
By now, you’re undoubtedly curious about secured credit cards and why you could be able to use one when all other options have failed. Since it can be used for transactions, a secured credit card functions similarly to an unsecured credit card in that it provides a line of credit.
The primary distinction is that, in order to use a secured card, you must often deposit a refundable security deposit equal to your credit limit. The money that you deposit serves as collateral. In the event that you default, the credit card issuer will use it to pay back your balance. They are referred to as “secured” for this reason, yet practically anyone can be accepted as well.
The majority of secured cards have low initial limits, typically $500. Your initial security deposit for a $500 secured card would probably be in the same ballpark.
Every time you use your secured card to make a purchase, you are essentially borrowing against your personal funds. It sounds like a bad concept, and it isn’t. Generally speaking, individuals with bad credit can only apply for secured credit cards.
On-time monthly payments improve your credit score.
In case you’re wondering what the point is, here’s the easy explanation: Experian, Equifax, and TransUnion are the three credit agencies that receive payment history reports from secured credit cards. Your credit record will show your timely payments when you responsibly utilize your secured credit card. By doing this, your credit score rises.
Your credit score may rise to the point where you are eligible for an unsecured standard credit card if you use a secured credit card for an extended period of time. You could then get your security deposit refunded and close your secured card account.
Consider a Secured Credit Card for the Following Five Reasons:
Secured credit cards were primarily designed for people who didn’t qualify for unsecured credit cards. They aren’t really giving you credit at all because they want a security deposit as collateral. These credit cards are intended for people who are trying to establish credit.
Secured cards are also used by some individuals to start over while building credit. It might be challenging for a person without a credit history to get authorized for any kind of loan. Secured credit cards enable people to establish credit when they don’t currently have any because they are practically universally available.
Would you be a good fit for a secured credit card? Even if you’re not sure, you might want to think about this kind of credit card for the following five reasons:
1. A secured credit card can aid in credit building when other methods fail. Having a secured credit card may be your only option for improving your credit score if you aren’t eligible for an unsecured credit card or any kind of loan.
2. You may be eligible regardless of your credit score. You will probably be eligible even if you have no credit history or a low credit score.
3. You can improve your credit with little to no use. To have a significant influence on your credit score, you don’t have to use your card every day. Since your payments will be reported to the three major credit agencies, making a few purchases each month and paying them off might have a significant positive impact on your credit score.
4. Build a positive credit history safely. A secured card could be just what you need if you want to reduce your risk and relearn responsible credit use. In addition to having a low starting limit, the security deposit you make will safeguard the transactions you make.
5. Your secured card does not have to last forever. Remember that it’s not necessary for it to be your final credit card. When you use your card frequently enough to improve your credit score, you can switch to a regular credit card with greater benefits and rewards.
How to Choose a Secured Credit Card
Secured cards don’t always have the best terms and rates because they are meant for those with bad credit. They typically offer little bonuses and perks in addition to hefty fees and interest rates.
However, some newer offerings offer surprising benefits and value.
3 Best-Secured Credit Cards
Visa® Credit Card with Secured Chime Credit Builder
This Chime® credit card is one of the first of its kind. It’s also the greatest secured credit card out there, in our opinion.
Typically, banks require a minimum deposit to open an account. On the other hand, this card does not demand a minimum security deposit6. Furthermore, there is no interest or yearly fee1.
A Chime Checking Account and qualified direct deposits totaling $200 or more are all you need to apply. It takes two minutes to open a checking account, and there isn’t a credit check required. Your payment history is reported to the three main credit bureaus by Chime.
Discover it® Secured Credit Card
With this secured credit card, your credit limit is probably going to be modest. On the other hand, you can receive 1% back on all other purchases and 2% back on the first $1,000 in combined restaurant and gas station expenditures made each quarter. Even with a protected card, that’s a great bargain for a no-fee card.
The Discover it® Secured card reports to all three major credit bureaus, just like other secured credit cards, allowing you to gradually improve your credit. It offers the possibility to earn incentives based on your spending and has no hidden or annual fees. But bear in mind that this card has a variable interest rate of 24.99%.
Capital One® Platinum Secured Credit Card
Capital One®’s Platinum Secured is an additional excellent option. No annual fee for this card. However, the initial credit limit (together with the associated security deposit) is limited to $200.
If you make on-time payments for five months straight, Capital One might increase your credit limit.
There are many more credit cards to think about, but these are some of the greatest secured credit cards available. Make sure to seek secured credit cards with the following features while perusing available card offers:
• No fees or extremely low fees
• Added benefits include FICO score access.
• The chance to gradually raise your credit limit
• Reporting to Experian, Equifax, and TransUnion, the three main credit bureaus
How to Use a Secured Credit Card
It’s crucial to have a plan in place before applying for a credit card and making purchases with it for a number of reasons. Selecting the appropriate protected card is crucial. However, it’s even more crucial that you use it for your own profit.
To make sure your secured card has the greatest possible influence on your budget and credit standing, follow these steps:
Pay your bill early every month.
Your payment history is the most important component that determines your FICO score. Three-quarters of your score comes from it. Therefore, you must ensure that you never pay late.
Make sure you are ready to pay your credit card bill early or on time every month before applying for a secured credit card. Your new card may cause more harm than good if you make late payments.
Don’t max out your card.
The amount you owe in relation to your credit limitations is the second most important component that determines your credit score. Because of this, regardless of how low your credit limit is, you should always avoid using your secured credit card to its maximum. In this manner, your utilization will never increase to the point where it lowers your score.
The majority of experts advise limiting your credit utilization to less than 30%. This implies that if your credit limit is $500, you must hold a balance of less than $150.
Charge small purchases and pay them off monthly.
You can raise your credit score without incurring any problems if you limit the minor purchases you make with your secured card to amounts you know you can afford to repay each month. For instance, you may program your protected card to be used automatically to pay your phone or cable bills. If you’d want, you may charge as little as $5 or $10 a month.
Don’t use credit to spend more than you have.
Lastly, never use credit as a justification for unnecessary purchases. In the event that your credit limit is increased, this is extremely crucial. You must practice self-control and discipline if you want to maintain good credit over time. You won’t be able to start creating a lifestyle free of credit card debt unless you can say “no” to yourself.
It’s possible that you’re not ready if you’re concerned that you won’t be able to use a secured card in a way that will help your circumstances.
How much can my credit score be improved with a secured credit card?
Your unique credit history and current credit score will determine how much your credit score will rise with a secured credit card. However, you should anticipate seeing an improvement in your credit score if you responsibly utilize your secured credit card and make all of your payments on time.
How else can I build credit?
Another method for establishing credit is with a credit builder loan. Credit builder loans, like secured cards, aim to assist people with little or no credit history in establishing or repairing their credit.
Community banks, credit unions, and internet lenders are typically the ones offering these loans. The borrower will not have access to the loan money until the loan is fully repaid, thus the lender will deposit them into a savings account.
Monthly loan repayments are made by the borrower and are recorded with the main credit bureaus. The borrower’s credit score will start to rise as long as they make timely loan payments. For people with no credit history or bad credit history, credit builder loans are an excellent approach to start establishing credit.
Bottom Line
It might not seem ideal to apply for a secured credit card. For those whose credit is so bad that they are unable to qualify for another credit card or loan, these cards offer one of the few options available. However, that does not in any way imply that secured cards are a terrible option.
They can be an invaluable tool in the real world. You can use your card to demonstrate your creditworthiness and gradually rebuild your credit if you are accepted. You might eventually even raise your credit score to the point where you can transfer to better credit products with fewer limitations.
Take a deeper look at secured credit cards before giving up your credit. Even while they’re not flawless, they can save your credit when nothing else can.
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