Looking for a new credit card can be stressful, especially if you have been denied for cards in the past due to your credit score. Low credit scores can make it difficult to get approved for credit, but that does not mean that it is impossible or even a bad thing. A secured card can be a perfect option for you if you have had credit issues in the past or if you are just starting out and looking for your first credit card. They offer all the same benefits than an unsecured credit card does, and in some cases, they are a better option than unsecured card. Take a look below to learn more about how a secured card could be the perfect fit for you.
With a secured credit card your security deposit becomes your credit limit that you can borrow against to make everyday purchases. Many secured cards let you deposit any amount that you would like within a certain range, typically a couple hundred dollars all the way up to a few thousand dollars. When choosing how much you would like to put down as your security deposit keep in mind what types of purchases you plan to make on the card and how much you plan to spend on a monthly basis. You will want to put down a security deposit that is beneficial to your spending habits. If you plan on spending $500 a month on your card, putting down a $500 security deposit will not be enough. Your debt to credit ratio will be too high and could hurt your credit score. Try to keep your debt to credit ratio lower than 30%, so if you plan on spending $500 a month it is safer to put down a $2,000 for a security deposit so your debt to credit ratio is 25% so that your spending does not negatively affect your credit score.
As with any credit card, secured credit cards report your credit activity to credit reporting agencies. This is important if you are needing to improve your credit score. If you use the card responsibly and show that you can manage credit and debt with your card a positive credit history and score should begin to take form. It is important to know that it is much easier to lower your credit score than it can be to raise it. Regarding your credit score, a single missed or late payment could take months to recover from. If you show that you can manage your balance, pay your bills on time, and pay at least the minimum due, you should begin to see your score go up.
Starting to build your credit score from scratch or trying to improve your credit score after a financial hardship can be difficult, especially when applying for credit cards. While many unsecured credit cards have required credit score minimums to be approved for the card, you can be approved for a secured credit card even if you have less than perfect credit. Secured cards are designed for those with poor credit or who do not have a credit score at all. They can be used as a tool help your credit score improve so you can qualify for more favorable credit cards and loan options in the future. If you have experienced financial hardship and your score has suffered because of it a secured card could be your only option. Even many credit cards for bad credit will deny applicants below a certain credit score as they may be too risky to extend an unsecured credit line to. Since secured cards are backed by your security deposit, they approve people who have less than perfect credit when other cards may not.
Although a secured credit card may seem completely different from a traditional unsecured credit card because you must fund your credit limit, it acts no different after your account is opened. If you end up closing your account once your credit score improves and you can qualify for an unsecured card you will get your security deposit returned to you as long as your account is in good standing with the bank. You can use your secured card to make purchases online, in store at the gas station and wherever else credit cards are accepted. Most secured cards are backed by Visa and Mastercard so you also get the protections that come along with being a card from those networks. Things like $0 fraud liability, extended warranty coverage, 24/7 customer service and more. Outside of you funding your credit limit, which is fully refundable to you, a secured card is just like any other credit card and can be a beneficial tool for you to build your credit if used responsibly.
Secured credit cards are almost exactly like standard, unsecured cards, except that they require the payment of a refundable security deposit before your account can be opened. With most secured cards, you can even choose the amount of your deposit, which becomes your credit limit. But otherwise, your secured card will work just like any other credit card. You will receive a monthly statement, and you will have to make at least your minimum payment on-time.
In addition, your payment history will be reported to the three major consumer credit bureaus. If you make all your payments on-time, a secured card could quickly help you to improve your credit history and raise your credit score. And when you use your card, no one will know that it is a secured card, and it will be accepted everywhere that other credit cards can be used.
Your credit is an extremely important part of your financial health, and having good credit can help you to rent an apartment or get a home loan. Good credit is also important if you need an automobile loan or any other kind of personal loan. And the better your credit history is, the lower the rate you can qualify for. Your credit history can also be a factor in your insurance premiums and be considered as part of a pre-employment background check.
While you cannot build a strong credit history overnight, many secured card users find that their credit has improved enough after one year to qualify for a standard, unsecured loan, so long as they make all their payments on-time.
Another reason to get a secured credit card is to enjoy all the benefits of using a credit card as your method of payment. For example, it can be very difficult to rent a car or reserve a hotel room without a credit card. It is also much safer to carry a credit card than it is to carry cash. Also, using checks is both more time consuming and more vulnerable to fraud.
When you use a secured credit card, you will receive all of the same legal protections that other credit card transactions have, such as the ability to dispute charges for goods or services you did not receive, or for those that were not as described. Thankfully, all credit cards that are part of the Visa network comes with a $0 fraud liability guarantee.
Finally, a secured card is an excellent alternative to the other credit cards often marketed to people with damaged credit. Although these cards do not require a security deposit, they often have very large annual fees and monthly maintenance fees, along with much higher than average interest rates. When you consider the total cost of all these non-refundable fees, they can approach or even exceed the amount of the refundable security deposit necessary to open a secured card.
1. Make All Payments On-Time. Paying on time is one of the biggest determining factors in your credit score. Every time you make a payment on time it gets reported to credit bureaus and can help improve your credit as you prove your creditworthiness to lenders. However, if you miss a payment or pay late that also gets reported and can negatively impact your credit score.
Many creditors offer the ability to set up automatic reminders when payments are due so that you do not miss a payment date. Some even have the option to set up automatic payments to ensure that you pay on time every time.
2. Keep Your Debt Level Low. Your debt to credit ratio is also a very important factor in determining your credit score. Using a small amount of your credit line, even though it is secured by your deposit, shows the lender that you can use the card responsibly. It is recommended that you keep your debt to credit ratio under 30% to show lenders you can manage your credit. For example, if you have a $1,000 credit line it is recommended that you not charge more than $300 on your card.
3. Do Not Carry A Balance, If Possible. Try your best to not carry a balance from month to month by paying your statement balance in full when it is due. By doing so you will avoid paying costly interest charges on your balance. Creating this habit now will better you for the future when you graduate from a secured card to an unsecured card.
4. Watch Your Credit Score. Many credit cards offer cardholders a free monthly credit score to review and may even show you the things hurting and helping your score so you can make adjustments if needed. Take advantage if it is offered and monitor your credit score. Sometimes seeing your score go up is just the motivation you need to continue doing what you are doing, even if it is tough. You may also review your score and see that it has gone down and that can be a good alert for you research to see what caused the drop and fix it. The sooner you realize there is a problem the less damage the problem can cause.
If you have had issues getting approved for an unsecured credit card because of your credit score, a secured card may be your only option. Just because it may be your only option does not mean that it is a bad option. Secured cards offer you all the same benefits that an unsecured credit card will offer you. The only difference is that you will have to put a security deposit down to open your account. Secured cards can also be beneficial if you expect to carry a balance month to month because they typically offer lower APRs than unsecured cards for bad credit. If you are looking to improve your credit score with a credit card and you can afford to put down a security deposit you will likely be better off getting a secured card than you would be an unsecured card for bad credit.