Building and improving credit can be challenging, but utilizing a secured credit card can be an effective solution. A secured credit card is different from a traditional credit card in that it requires a cash security deposit held by the credit card issuer. This reduces the risk for the issuer and makes secured cards easier to qualify for. To use a secured credit card to build and increase your credit score, it is essential to choose the right card. Look for a card that reports to credit bureaus and has reasonable fees. Paying the deposit on time is crucial, as neglecting to do so could result in losing approval for the card. To increase your credit score with a secured card, use the card regularly, keep the balance low and pay the bill on time every month. By utilizing a secured credit card in a responsible manner, individuals can improve their credit score and eventually move on to better options.
Difference between a Secured and Unsecured Credit Card
The main difference between a secured and unsecured credit card is that a secured credit card requires a security deposit, while an unsecured credit card does not require one. The security deposit serves as collateral and protects the card issuer, and it becomes the credit limit for the account holder.
Approval for a secured or unsecured credit card depends on the lender's policies. It is not guaranteed that an applicant will be approved for a secured credit card, but responsible use of one can help establish, build, or rebuild credit, which can lead to qualifying for other credit cards or loans.
Use and Functionality:
Secured and unsecured credit cards generally work in the same way and can be used to make online or in-store purchases. The key difference lies in the security deposit requirement and credit limit. An unsecured credit card may come with lower interest rates, fewer fees, and rewards.
Reporting and Credit Score:
Both types of credit cards can be used to establish or build credit, and the issuer typically reports account activity to credit bureaus, such as payment history, account history, and card balance. The use of secured credit cards can improve credit scores over time when used responsibly.
Responsible use of credit cards, whether secured or unsecured, is crucial in maintaining and improving credit scores. Missed payments, maxing out credit cards, and opening too many accounts at once can negatively impact credit scores.
How to Increase Your Score Using a Secured Credit Card?
1) Only use what you can settle monthly: By obtaining a secured credit card, you can demonstrate to loan providers that you are capable of managing your finances effectively. The most straightforward method is to make minor acquisitions and pay off your debts entirely before the end of each month. This will enhance your payment track record, which makes up 35% of your FICO Score.
2) Make several payments per month: The financial reports about your borrowing activities are regularly shared with the three major credit bureaus- TransUnion, Equifax, and Experian- by your lenders. Unfortunately, there is no obligation for these lenders to notify you when they send your report. As a result, you might be paying your debts later in the month while they are being recorded earlier. Consequently, your credit score may be impacted unfavorably.
3) Go for a low-interest Secured credit card: To establish a good credit score, it's important to prioritize paying off debts. However, having a credit card with high-interest rates can make this difficult. To make it easier to meet your obligations, look for a card with low interest. In general, credit unions provide better options for cards compared to banks. When shopping for a card, consider ones that have additional perks such as cashback rewards and higher credit limits beyond your security deposit.
4) Choose the right card: If your credit card provider does not share information about your card usage with credit bureaus, the aforementioned strategies will be ineffective. It's important to note that not all secured credit card issuers report to credit bureaus, unlike other types of accounts. Therefore, before submitting an application for a card, make sure that your activity on the account will be reported.
5) Monitoring and tracking your progress: Monitoring and tracking progress on a secured credit card is essential to ensuring success in building credit. Many issuers offer tools to help cardholders track their spending and progress toward meeting their goals. American Express no longer offers a tracking tool, but they have a user-friendly chat function where customer service agents can help cardholders track spending progress. Bank of America and Discover don't offer tracking tools, so cardholders must monitor their progress themselves. Barclays offers a spend analyzer that gets the job done, and Capital One no longer informs cardholders of their progress, so calling customer service is the best way to get an accurate update. Chase has a convenient tracker to monitor progress, and Wells Fargo allows cardholders to track their progress toward earning their bonus online. By regularly monitoring spending and tracking progress, cardholders can make sure they stay on track toward achieving their credit-building goals.
6) Moving on to an unsecured credit card: When comes to moving on to an unsecured credit card from a secured credit card, there are a few factors to consider. Firstly, a secured card is a great tool for building credit, but it comes with some limitations such as a low credit limit and high-interest rates. To move up to an unsecured card, one's credit needs to be in somewhat decent shape. Building a track record of responsible behavior reflected in your credit score is important. This includes making one or two purchases each month and never going over 30% of your credit limit. Paying bills on time is also crucial to maintain a good credit score. While there are unsecured cards for people with bad credit, they tend to come with high fees. Ideally, it is best to convert a secured card to an unsecured card from the same issuer once your credit score has risen into the fair or average range. It is also important to note that the decision ultimately depends on the issuer's policies and whether they offer an unsecured option.
The Bottom line:
Secured credit cards offer an opportunity to increase your credit, but they are still susceptible to being misused like any other card. To make the most of them, it is important to find the best options available and to use the card responsibly. This means avoiding maxing out the card, carrying a balance, or handling too many cards at once.
Improve Your FICO® Score Instantly
Ready to start improving your low credit score within two months?