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How to Use a Secured Credit Card
If you are just beginning to build credit, or have a damaged credit history you’d like to rebuild, a Secured Credit Card can help improve your score if you use it wisely. In fact, a secured card is one of the best ways to build credit when you’re not yet eligible for a traditional Unsecured Card. While a secured card can help you to establish a positive credit history, it’s important to understand how to use these cards so you don’t end up frustrated, or worse, damaging your credit altogether.
Not all credit card issuers offer a secured credit option, but several do. A secured credit card looks and acts the same as an unsecured card, except for a few key differences. First, in order to activate a secured card, you’ll be required to send in a refundable deposit to the credit issuer. Second, your credit limit will likely be lower than what you can get with an unsecured card. Third, secured cards include higher interest rates and more fees, particularly annual fees. These features generally cannot be avoided on a secured credit card (or even an unsecured Credit Card For Bad Credit), because people with lower Credit Scores are considered to be larger financial risks.
However, just because you have to pay a deposit, and your credit line is limited, and the annual fee is more than you’d like to pay, does not mean secured cards are bad. In fact, millions of Americans use these cards successfully to help build better credit. The simple truth is that you need to use credit wisely in order to get more favorable terms on credit in the future. Thus, in the event that you’ve got less-than-great credit now, the two best things you can do are: (1) resolve the issues that caused your credit to suffer, and (2) establish new Good Credit habits to replace the bad. Fortunately, secured Credit Cards can help you get access to this new credit when you need it most.
Having said that, the problem most people run into when using a secured credit card is using it like a traditional credit card instead of as a rebuilding tool. Unfortunately, these cards are not to be treated like traditional credit cards. Rather, secured cards need to be used as the strategic resource they are.
So, how should you use a secured credit card?
- Select the right card for you. Most Secured Credit Cards have an annual fee of anywhere from $25 to $100 a year, with some cards offering prices below or above that range. You don’t get any extra features for the higher price, so choose the card that will cost you the least, and that matches your spending habits to keep all the other fees low as well. Make sure to consult the card’s Schumer Box, as well as review the terms and conditions before applying for any card.
- Be committed to only using 30 percent or less of your credit limit. For example, if you’ve got a $300 credit line, your balance cannot be more than $100, at any given time, or you’ll actually begin to hurt your credit. If you need to purchase a more expensive item, see if you can pay for it in installments, or better yet, save up the cash and don’t use your secured credit card for this type of transaction. Ideally, rather than charging items that raise your balance above 30 percent, you should make a few small purchases a month (e.g., at gas stations, on groceries, or for low-cost entertainment like dinner and a movie). And you should never charge more than you can afford to pay off within the next day or week.
- Try not to carry a balance for more than a day or two. The credit card issuer will determine the date upon which they will report the details of your account to the credit bureaus, but generally it tends to be anytime there are changes to the balance (contact the card issuer for the details). This may be okay if your total utilization is less than 30 percent, but if it’s over that, the credit issuer may report that, which may result in a lowered Credit Score.
- If you’ve got other credit cards, make sure to think of how your secured credit card use may affect the others. For example, if you’ve got two additional credit cards, both carrying balances that are over 30 percent of their limits, you’ll want to wait to use your secured card. When you don’t use your card, it will help increase your overall credit score because it lowers the utilization rate across all cards. Thus, it is recommended that you pay down part or all of the other credit cards before you begin charging to your secured card. This way, when you have a balance on this card it will not push your total utilization rate more than 30 percent across all cards.
- Be patient with your credit score. Review your reports often (every 60-90 days) to make sure that it is free of errors, and that all your creditors are reporting accurate information. Even if you use a secured credit card perfectly, it may take up to two or three years of ideal use for your score to go from bad to good. While you will see early gains (it’s certainly possible for your credit score to increase by 50-80 points in the first year), any negative marks on your report will still affect your overall score. There is not much you can do about this except to continue practicing good credit habits (like paying down your debt, not carrying a balance on revolving lines of credit, and making all payments on time) while waiting patiently for the negatives to fall off your reports.
- Forget loyalty; ditch that secured card when your credit improves. It’s great when banks are willing to offer you credit after you’ve had a sketchy past. It’s even better when you can use that card the way it was intended, and see your credit score rise. However, don’t let your sense of gratitude, or loyalty, keep you from moving on to bigger and better cards. If you’ve used your secured card well, after approximately six months to a year your credit score should increase enough to qualify you for an unsecured card. Apply for one or two Unsecured Cards that match your spending needs, and then close the secured account. This way you can establish an Unsecured credit history, and get rid of the costly secured card before you’ve had the account for too long. Keeping your eye on the goal in this way can save you hundreds or thousands of dollars, over the course of a few years. Here are some Unsecured Credit Cards for your consideration:
Ultimately, if you manage your secured credit card well and use it wisely, your reward will likely be a great credit score that you can be proud of. While secured credit cards are not a perfect financial product, they are a great tool for improving your credit when it can be difficult to get a traditional credit card. And just like those traditional cards, you need to use a secured card carefully and strategically, and grow good credit habits; otherwise you can lower the effectiveness, and increase the costs associated with these types of credit cards.
Want more? Apply for one of these secured credit cards today:
by CreditQ Staff
Published 07/05/2012 16:14
Credit Card Info and Advice
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