SubscribeWhen used correctly, secured credit cards can be very useful tools in building or rebuilding your credit score. You can use them to prove your ability, or renewed ability, to make timely payments, and ultimately get the benefits of being credit worthy. To utilize it correctly, you must have the answers to the following questions.
What is a secured credit card? Not to be confused with a debit or check card, it is an actual credit card account issued by a lending institution that is opened with a deposit into a savings account, money market account, or certificate of deposit. The amount of deposit into this required savings account varies from card to card, but generally minimum amounts range from $250 - $500 and may be secured up to $10,000. The funds you deposit are considered ‘collateral’, and will even earn a little interest since they are being held in a true savings account.
What will my credit limit be, and what fees will I have to pay? The credit limit you will have is determined by the amount you deposit into the initial savings account. Sometimes the limit will be for the full amount of the deposit; other times it will be a percentage of the total. Other fees that may be attached to your account are application fees, annual fees, and processing fees. It is important to note that all companies do not charge all of these fees. Always read the terms and conditions of the credit card to determine how much you will have to pay in fees before you apply.
What are the benefits to my credit score with a secured credit card? If you have never had a credit card, a good first step in establishing good credit is to apply for a secured card. Assistant Professor of Economics at Austin Peay State University in Clarksville, TN, Jerry Plummer says, ‘A secured card is most useful for the person starting out on their credit history, since it says that the person is willing to take the extra step to establish credit.’
If your credit history is severely damaged, a secured credit card can be used as a great tool to reestablish your creditworthiness. Additionally, it may be the only kind you qualify for. Using a secured card appropriately within the set parameters will help rebuild your credit and can ultimately qualify you for an unsecured card. It is important to note that if you have filed bankruptcy, you may not qualify until it has been discharged.
Can my credit limit be extended beyond the savings deposit amount? Preset limits cannot be exceeded. If poor spending habits were part of the cause for bad credit, then a secured credit card will help keep spending under control.
Can I use my secured card to rent a car or book a hotel? Yes. Secured cards are very useful for transactions like these that require a credit card. Many hotels and car rental companies will not accept a debit or check card to make reservations, even if you intend to pay cash in full upon the completion of your trip or stay. Your secured card can be very handy as you are able to complete these kinds of transactions with it.
When building or rebuilding my credit, should I make payments or repay the whole balance every month? If you never carry a balance because you pay the card off in full each month, you are not demonstrating the ability to handle credit, which is what unsecured credit card companies are looking for. Timely payments are what counts toward achieving a good credit score. You should also be aware that frequently charging to the limit on your card can hurt you. It makes you look too dependent on it. The best way to establish a good repayment history is to charge something every so often and take a month or two to pay it back. This is a very reasonable approach to building a credit history with your secured card.
What happens if I do not make a payment on time? It is important to keep in mind that a secured card is a credit card, not a debit card. Because of this, if full payments are not made each month, then interest is charged on the outstanding balance. The lending institution uses the security money to pay off the debt only as a last resort. Even though the card is secured, it is still possible to damage your credit. If you just use it wisely, you will be rewarded.
Will my payment history get reported to the credit bureaus? Many companies report your payment history to the credit bureaus on a regular basis, but there are some that do not report your history at all. If your goal is to build or rebuild your credit score, make sure you utilize a company that reports your payment history to the credit bureaus. The report of timely payments is what helps you to increase your credit score.
What are the components to a credit score? There are 5, and each of them hold a different weight when it comes to determining your creditworthiness:
Payment history - 35%
Amounts owed - 30%
Length of credit history - 15%
New credit - 10%
Types of credit used - 10%
Overall, what should I do to make sure my credit score is being built or rebuilt successfully? The formula for using secured credit cards as a useful tool in building or rebuilding your credit is pretty basic. If you use your card in moderation, carry a balance less than 60% of the limit, make consecutive timely payments, and your credit card company reports your payment history to the credit bureaus, you can take advantage of acquiring a secured card. Building a good credit history when you have no credit now will put you on your way to showing creditworthiness in the future. For those that have severely damaged credit as a result of poor payment habits in the past, secured credit helps you demonstrate your improved habits. It can be a win, win - if you make it so.
-Ken S.
Ken S. is the founder of LowRateSearch.com - dedicated to helping consumers save money through low rates on loans, insurance, and travel.
Article Author :Ken_S
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