This is the 2nd article of 3 in a series called “A FREE Online Course – Steps To Better Credit.”
Step 2 – The Power of Secured Credit Cards, When Building Your Credit Profile
Maybe you’ve made some mistakes with your credit in the past, but you’re ready to make the move to a healthy, robust credit score. You’re in luck; credit recovery is absolutely possible. It’s important to get expert information in the process, however, since you’ll need to be strategic in your efforts. Using a secured credit card is one of the best ways to begin shoring up your credit score. Today, we’ll talk about why secured credit cards are powerful tools, and how you can leverage them to your benefit.
Credit repair is a complex process. Though removing harmful information is indeed important, it’s not enough to create a full credit recovery. In the past, we’ve talked about how to report inaccurate or harmful information from your credit report. However, this alone won’t be enough to get you on the path back to a healthy credit score. A secured credit card is simple to obtain, and can be used as a way to work back to traditional credit cards.
Here’s How to Put A Secured Credit Card To Good Use
Here’s how it works. Whenever you buy something with a credit card, the card issuer is essentially lending you the money to pay for your purchase. Your signature on the credit card reader is essentially a promise to repay that loan. Therefore, you need decent credit to qualify for most credit cards: If you have a low credit score, or you don’t have a credit history at all, card issuers won’t have much confidence that you’ll pay back what you borrow. So, they’re unlikely to approve you for a card.
A secured credit card offers you a chance to demonstrate that you can handle credit responsibly without requiring the issuer to take a risk. You give the credit card issuer a security deposit that it uses as collateral for the money it lends you when you use the card. You are, effectively, securing that debt yourself. In most cases, your credit line is equal to the amount of your deposit. For example, if you make a deposit of $500, you will have $500 of available credit.
A secured card is not the same as a prepaid card. With a prepaid card, you load money onto the card, and the card issuer uses that money to pay off your purchases. With a secured card, your deposit is there only to protect the issuer if you fail to pay your credit card bill. It’s critical that you pay your bill.
Use Your Secured Card Wisely
The choices you make in getting and using a secured card can go a long way toward improving your credit. You should:
- Get a card that reports to the three major credit bureaus. We recommend a secured credit card with Discover.
- Using a secured card can help you improve your credit score, but only if the issuer reports your account activity to the credit bureaus.
- Use the card. The card issuer needs to see that you can use the card responsibly; to prove that, you actually have to buy things with it. Making even one small purchase a month will count as activity on the card and will help to build your credit score.
- Keep your utilization ratio low. The utilization ratio is the total amount you owe on the account, expressed as a percentage of your available credit. (If you have a $500 credit limit and a $50 balance, for example, your ratio is 10%.) A low credit utilization ratio shows that you’re not overspending. If you need to make a large purchase that brings you close to the limit, pay it off right away — if possible, do it even before the bill arrives.
- Paying early is paying on time when you’re looking to improve your score. When you pay your secured credit card before the statement end date, the balance reported to the bureaus should be at or under a 10% utilization rate. The statement closing date is the date the due balance is reported to the bureaus.
- Don’t ever pay late. Paying your bill on time is the single biggest factor in building a strong credit history. If you don’t make at least the minimum payment by the due date, your score will probably drop, and you’ll have a harder time graduating from your secured card. Of course, paying the entire balance in full every month is great, but if you need to run a balance for a little while, it’s still important to make at least the minimum payment on time.
Graduate To An Unsecured Card
Once you’ve been using your secured credit card carefully for some time, you might move into fair or average credit territory — generally considered to be a FICO score above 630. At that point, you have a good chance of qualifying for an unsecured credit card. The issuer of your secured card might agree to convert it to a regular credit card, or you can apply for a credit card for people with average credit. When you close or convert a secured card, you should get your security deposit back.
The habits you formed while you had a secured card will serve you well with an unsecured card, too. Keep on using your card regularly, maintain a low credit utilization ratio and pay at least the minimum balance by the due date every month, and your credit will continue to get healthier.
A Time for Action
The sooner you act the sooner you will see the credit score you are dreaming of. While we work to clean up your credit report, you should be working on building a credit history that will fuel higher scores. New credit cards take time to deliver their full benefit; if you need them, we will let you know at the very outset, so you can act.