Having credit is an essential part of doing business in the world. You need credit for a number of life decisions from renting an apartment to buying a house. Even buying a cell phone requires you to have good credit.
The tough part about building credit is getting started. You’ll need to have open, active accounts on your credit report to be approved for credit accounts. Without any existing accounts, getting approved for the first one can be tough. A secured credit card is a great option for building credit, especially when you’re first starting out.
What is a secured credit card? The definition of a secured credit card is a type of credit card that requires you to make a deposit to “secure” the credit limit. The deposit is kind of like a down payment on the credit card. It’s kept in a savings account or certificate of deposit until your account is closed or converted to an unsecured credit card. Your deposit will be refunded to you as long as your account remains in good standing. However, if you default on the credit card balance, the credit card issuer will keep the security deposit to satisfy your balance.
Your credit limit will be equal to the security deposit you make. If you make a $200 security deposit, for example, you’ll have a $200 credit limit. Depending on the credit card, you may be able to increase your credit limit after your account is opened by making an additional deposit. A credit limit increase gives you additional purchasing power.
In addition to building credit, secured credit cards for bad credit can be a valuable tool to get you back on track. Since your secured collateral is your deposit you may find secured cards with no credit check or credit score requirement. The secured funds minimalizes the creditor risk.
Once you’re approved and you’ve made your security deposit, a secured credit card is just like a regular credit card. You can use it to make purchases and then pay off your balance to open up your available credit again.
As long as you choose a secured credit card that reports to the major credit bureaus, your account details are included on your credit report and used to calculate your credit score. Secured credit cards are reported just like other credit cards, which means you won’t be penalized for taking the secured credit card route. Other businesses that review your credit report won’t be able to tell that you’ve used a secure credit card to build your credit.
Now that you know more about how secured credit cards work, here are some tips you can use to build credit using a secured credit card.
Make the biggest security deposit you can afford. While there are secured credit cards that let you make a security deposit as low as $200, having a higher credit limit is better. First, demonstrating that you can handle larger credit limits will make it easier to get approved for an unsecured credit card with a larger credit limit. Second, a larger credit limit gives you more room to make purchases without hurting your credit score.
One of the most important factors in your credit score is the amount of debt you’re carrying. Keeping your credit card balances low relative to your credit limit boosts your credit score. On a credit card with a $200 credit limit, for example, you’d only able to charge $60. However, if you can make a security deposit of $1,000, that amount would increase to $300.
Make small purchases that you can pay off each month. You don’t have to run up a big credit card balance to build a good credit score. Even if you’ve made a large security deposit for a bigger credit limit, it’s still best to carry only a small balance on your credit card.
Remember, you should ideally keep your credit card balance below 30% of your credit limit. Making small purchases ensures you’ll be able to pay off your full credit card balance each month. Your credit card issuer will only require you to make the minimum payment, but you should pay in full anyway to avoid paying interest and avoid getting into more debt than you can handle.
Make your payments on time each month. Payment history is the most important factor that goes into your credit score. Your credit card issuer will notify the credit bureaus anytime you’re more than 30 days late on your credit card payment. Any late payments will hurt your credit score, especially when they’re recent.
To build good credit using a secure credit card, you should establish a history of 100% on time payments. Once you have your secured card, make your payments on time each month. If you’ve charged more than you can afford to pay in full, make at least the minimum payment by the due date. Your payment due date will fall on the same date each month, so you can set up alerts or an automatic payment to remind you to make your payment each month.
Choose the right secured credit card. There are several secured credit cards to choose from. Picking the best secured credit card is important for establishing your credit. Make sure the card reports to the three major credit bureaus. Credit reporting is necessarily for building your credit. If the account doesn’t show up on your credit report, it won’t help your credit score no matter how many on time payments you make.
If you need to make a low security deposit to get started, look for a secured credit card with a low minimum security deposit, which makes the credit card more accessible to you. Look for a secured credit card with a low or no annual fee to minimize the cost of your credit card.
Give it time. A good credit score doesn’t come overnight. It takes time to build up a history of timely payments. The longer you use your secured credit card responsibly, the more your credit score will improve.
Many credit card issuers refund the security deposit after 12 to 18 months as long as you’ve kept your account in good standing. That means making all your monthly payments on time. After that amount of time, you may even be able to qualify for an unsecured credit card and avoid making another security deposit
