So you’ve decided it’s time to improve your credit score… A secured credit card seems like the safest option to do that if you can’t qualify for the majority of the popular credit cards…
Then, using a secured credit card is probably the solution to your problem!
When you use a secured credit card you have to use it responsibly to reap the benefits and stay away from the drawbacks of using a credit card. A secured credit card can be a strong tool to build a good credit score and payment history. Perceive it as a necessary step to qualify for better credit cards and loans with better terms in the future.
What Is a Secured Credit Card?
To use a secured credit card, you’ll need to place a security deposit that acts as collateral. This amount often acts as your credit limit.
You can’t use this amount for payments though. If you’re a responsible payer, you’ll get that amount back after some months or when you close the account.
Otherwise, your creditor can collect this amount (if you fail to pay your bills).
In other words, the security deposit amount gives confidence to your lender that they won’t lose their money. For this reason, you can usually qualify for secured credit cards even if you have a poor credit score and bad payment history.
This kind of credit card usually has less or no rewards and higher fees compared to normal credit cards. However, their advantage is that they don’t require a good credit score to qualify.
Often, consumers take advantage of secured credit cards to build or rebuild their credit scores.
To successfully improve your credit score & payment history, you should take into account the following Do’s and Don’ts of using secured credit cards:
Do’s of Using Secured Credit Cards
- Use your secured credit card to make small purchases or pay bills (e.g. phone bills)
- Look for the right secured credit card that suits you.
- Keep your credit utilization ratio lower than 30%. Try not to spend more than 30% of your available credit.
- Make on-time payments.
- Set reminders not to forget to pay your bills on-time
- Contact your creditor if you miss some payments. They will probably help you create a better payment plan.
- Research if you can move to a better credit card program with better rewards after a few months of responsible secured credit card use.
- Check your credit reports regularly
Use your secured credit card to make small purchases or pay bills
Does your main purpose of using a secured credit card is to rebuild your credit score? Then, it’s a good strategy to make small purchases or pay affordable bills (like phone bills). This way, you should be able to make your on-time payments to sent positive signals on your payment history.
Do you want to use your secured credit card for bigger purchases? Plan ahead and make sure you can pay off your debt on time.
Look for the right secured credit card that suits you
The credit card market is really competitive and there are many different choices. Spend some time to perform market research to find a secured credit card that fits your budget and lifestyle.
You should compare the interest rates, application or annual fees and if there are any rewards (cash-back, travel, etc.)
Keep your credit utilization ratio lower than 30%
Your credit utilization ratio is among the most important credit-scoring factors. This is the reason you should try to keep it under 30%.
The credit utilization ratio is the total amount of the credit you’re using divided by the total amount of credit you have available.
For example, if your credit limit is $1000 and you’re currently using $250, your utilization ratio is 25%.
Make on-time payments
Making full on-time payments is the most important tip about using any kind of credit. This is because the payment history is the most important credit scoring factor (it equals to 40% on the FICO scoring model).
Note that making only the minimum required payments is not enough to build a good credit score. It actually has negative results.
Some credit cards claim that they don’t report your first 1-2 late payments as negative inquiries, but you have to pay them soon anyway.
Set reminders not to forget to pay your bills on-time
It’s easy to forget to accomplish a payment, even if you have the money available. Also, it’s easy to set up a reminder to make sure you never miss to pay your bills. You can set an alarm on your smart-phone, laptop, or even a note on your fridge.
Use whatever works for you!
Contact your creditor if you miss some payments
The majority of creditors are willing to help their customers pay off their bills if they felt behind. Don’t hesitate to contact your creditors to settle a more affordable payment plan and reduce the negative inquiries on your credit report.
Research if you can move to a better credit card program
If you’ve been using your credit card responsibly for some months, you might be able to qualify for a better credit card. You can search for a credit card with better cash-back or other rewards, lower or no fees, and lower interest rates.
Anyway, that’s the primary reason you want to start using a secured credit card anyway.
Check your credit reports regularly
Using a secured credit card only for small purchases or a few hundred dollars doesn’t mean you shouldn’t check your credit report as often.
Otherwise, your good payment history might not be reported as intended.
You should ask for a free credit report through AnnualCreditReport.com at least once a year. You have the right to ask for 3 free credit reports a year, one report from each three major credit reporting bureaus.
- your personal details are correct
- your account details (payments are correct)
- you recognize all the names and details to check you’re not a victim of an identity thief
- if there are any negative inquiries, they’re correct.
Don’ts of Using Secured Credit Cards
- Don’t carry large balances and don’t miss payments
- Don’t max out your credit limit
- Don’t apply for many credit cards in a short period of time, even if they’re secured credit cards
- Don’t overspend.
Don’t carry large balances or miss payments
If you fail to make full on-time payments, you risk all of your efforts to build a good credit score.
In addition, you’ll probably end up paying more money due to interest rates.
You shouldn’t even apply for a credit card if you’re not sure you can successfully make your on-time payments.
Don’t max out your credit limit
As mentioned above, keeping a low credit utilization ratio is an important credit scoring factor.
Even if you nearly maxed out your credit limit once, try to pay off the debt as soon as possible.
Keeping a high credit utilization ratio makes creditors think you can’t handle credit responsibly.
Don’t apply for many credit cards in a short period of time, even if they’re secured credit cards
Every time you apply for a new credit account, creditors add a hard credit inquiry on your credit report. A single hard credit inquiry is not a big deal although it deducts a few points off your credit score.
However, applying for too many credit accounts in a short period of time is a very negative signal to your lenders and even more points will be deducted.
Some secured credit cards claim that they don’t even check your credit score when you apply. As a result, they might not add a hard inquiry on your credit report.
However, it may be visible on your credit report.
Further, it’s better to invest that money to pay off your debt than applying for new secured credit cards. Having too many secured cards can confuse you and lead to more late payments or unnecessary additional fees.
It’s easy to lose control and go to a spending spree if you’re holding a credit card. But you must resist the urge!
As a rule of thumb, you should ask yourself if you’d buy this item/service with cash or a debit card. If the answer is no, you should probably skip the purchase.
Not only it will be harder to make full on-time payments later but you will also increase your credit utilization ratio.
This way, just one spending spree can put you into credit trouble and deduct many points off your credit score.
The Do’s and Don’ts of Using Secured Credit Cards – Summary
Secured credit cards can act as a powerful tool to rebuild credit or start building credit if you don’t have a credit score.
Of course, you have to use them responsibly to achieve your goals rather than sink more into debt. The most important thing to remember is to make full on-time payments and keep your credit utilization ratio lower than 30%.
Also, remember than even a few late payments can ruin your efforts to build a good credit score, especially if you haven’t a credit score already.
If you’re sure you can handle a secured credit card responsibly, research the best options for you and start improving your credit!
The Do’s and Don’ts of Using Secured Credit Cards – FAQs
How long does it take to build credit using a secured credit card?
If you have no credit history, it will take up to six months to get a FICO score and a month to get a VantageScore.
If you have a poor credit score, it can take up to 1-2 years to build a good credit score. Of course, you have to make full on-time payments every month. Note that public records such as bankruptcies take 7-10 years to disappear from your credit reports. They’re less powerful the older they are though.
How long does it take to report my payments to my credit reports?
Usually, it takes 30-45 days for your payments to be reported on your credit reports. However, it takes much longer to rebuild your credit score, especially if your score is very low.
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