If you have been through rough times and have seen your credit score fall to a number you just didn’t expect, availing, using and maintaining a secured credit card can really help rebuild your credit.
A secured credit card is a card that you obtain after paying a deposit. The deposit you makes “secures” the credit card in the sense that it will be held as collateral by the card’s issuing bank, should you not repay your balances. For example, you can put down $1,000 on as a secured credit card balance and be entitled to $1,000 in credit. If you rack up $500 in balances and then fail to pay off your balances, the credit card company will take $500 from your deposit and also deduct applicable late payment charges and any other charges. Since you can never use the card for more than your deposit amount, the credit card company can be assured that you will never be a delinquency risk to them.
You might then be wondering why at all you need to give the credit card company money to then technically only spend that money you gave them. To rebuild your credit history and score is why.
The three major credit bureaus treat history of a secured credit card account just like a regular unsecured credit card. This can mean that you can potentially increase your credit score by as much as 100 points in just 6 months! That can make a huge difference to the interest rates that are made available to you, when you are shopping for big ticket loans like a mortgage loan, personal loan or student loan.
Many secured credit card holders have reported that they are typically able to improve their credit score enough after only a year of using (and using it well) their secured credit card, to the point where they can qualify for unsecured or regular credit cards.
How fast can a secured credit card help with my credit score?
When you qualify and are issued a good secured credit card, like the Capitan One Secured Credit Card, you will immediately see about a 20 point gain to your credit score. Please note that this is the typical increase you can expect. It can be more, less or non-existent in your case, depending on several other factors such as the length of your credit history, your total debt, your debt utilization ratio, what is happening to your other credit items etc.
After you obtain your secured credit card, you can really leverage it to boost your credit score provided you pay off all your balances in full. Also, you must try to choose a secured credit card that will give you the option to increase your secured credit limit, via additional deposits that you can make to your credit card account.
For example, let’s say you initially are approved for a secured credit card with a $1,000 deposit and a corresponding $1,000 credit balance. Now, if you use this card and pay it off every time and then have an extra $1,000 to top up to your deposit, your credit limit also increases to $2,000. This will have a very good effect on your credit score.
Credit bureaus value payment history, debt utilization, length of credit history, type of debt and new credit balance to issue you a credit score. You can learn about the different weights given to these scoring components in this post about FICO credit score components at Money Looms. It will help you understand how you must efficiently maintain a secured credit card to maximize the help it can extend to your credit re-building process.
How to maximize credit rebuilding while using a secured credit card?
- Try paying off your balances in full. Payment history is the most important factor when it comes to factors that can help boost credit scores
- Try increasing your secured credit card limit, by topping up your security deposit and thereby increasing credit limit
- Try avoiding secured credit cards that have high annual fees and other misc fees that can hurt your ability to pay off balances in full
- Try not to maximize your secured credit card spending limits if you can’t pay off your balances in full
Some popular secured credit cards
If you are still hunting for a good secured credit card, you can quickly look through these popular cards.
This is a good card as it comes without annual fees. Besides the no-annual fee benefit, you get up to 2% cashback on certain purchases, with a guaranteed 1% cash back on all purchases. Applicable APR will be 23.25%.
We talked about this card earlier. This is the most popular secured card out there as the Discover card is a bit more difficult to successfully qualify for.
What makes this card very popular is that it will allow you to open a secured credit card by making just a $50 deposit and access a $200 credit line. Your standing is then reviewed after 5 months, assuming you have not defaulted or made late payments, and then your credit limit may be increased again. Applicable APR will be 24.99% and there is no annual fees here either.
Though this card levies a $25 annual fee, it can give you the ability to put down up to $5,000 as a deposit that will then become your credit limit. Minimum is $200. Applicable APR stands at 22.24%.
Prepaid credit cards are not secured credit cards
A prepaid credit card is not the same as a secured credit card! A prepaid card just allows you to top up a card with a deposit to give you the convenience of spending with a credit card. It will not do anything to rebuild your credit card. It is very important that you avoid prepaid cards when shopping for secured credit cards. Please read the fine print to distinguish between the two!