How Secured Credit Cards Can Help You Rebuild Your Credit
Your credit score is probably one of the most valuable tools you have at your disposal, and also one of the most fragile. It is very easy to wreck, and it takes a long time to build back up… and yet so many things depend upon it. For example, your ability to earn money can depend upon your credit score. That’s right – try to get a job at a financial institution or in a government position with a bad credit rating. It is simply not going to happen. If you really take some time to think about it, the reasoning makes perfect sense. If you owe people money, then you are a security risk that has the potential to be exploited.
In fact, it is not just government jobs and financial institutions that are doing this now. More and more companies are asking for credit checks before they offer you a job. Seven states have prohibited credit checks on job applicants, but that still leaves the majority of the country able to continue this practice.
Another reason to have a good credit score is that it makes things like car insurance cheaper. In most states, insurance companies are able to charge higher premiums to people with bad credit scores. The problem is, even if you have no credit, that is not good credit, so repairing your credit score is a necessity.
One of the fastest ways to repair your credit score is through what is known as revolving credit. This type of credit is different to installment loans such as car loans, etc. Revolving credit is the type of credit where you have a credit limit that you can use at any time, such as credit cards.
Unfortunately, this is a catch-22 situation. You need a good credit score in order to qualify for a credit card, and you need a credit card in order to get a good credit score. One way to combat this is through a secured credit card.
This is a credit card that is secured with a security deposit equal to your credit limit. So, if you have a $500 security deposit, you will be given a credit card with a $500 limit. Unfortunately, this type of credit is not cheap. You will usually pay an annual fee and have higher interest rates than with a normal credit card. However, if you use your secured credit card correctly, you will be able to qualify for an unsecured credit card within a year or two.
Another benefit to a secured credit card is that it is essentially a savings account that you are forced to have, that also earns interest. The interest earned will go some way to offsetting the fees for having the credit card.
There are a few things, however, to watch out for.
1. Make sure the secured credit card you obtain reports to all three credit bureaus.
This is an absolute must. If the secured card does not report to all three bureaus then you may as well not have it at all, as it will not increase your score.
2. Watch out for hidden charges and fees.
Some secured credit cards prey on people with bad credit and charge exorbitant fees. For example, I heard of one card that required you to have an insurance policy with a $55 per month premium.
3. Don’t think of it as a debit card.
Just because you secured the credit limit with a security deposit doesn’t mean that this card is a debit card. It is most definitely not. You have to treat the two accounts separately. The security deposit is simply a savings account that you cannot touch. The credit card is an actual credit card with interest and fees.
4. Don’t over-extend.
The fact that you have a credit limit is not an invitation to use it. Credit companies like to see a large gap between your available credit limit and your credit balance (know as your utilization rate). That shows them that you have the ability to be responsible with their money. However, you do need to use the card for it to be of benefit to your credit score.
The best way to do this is to make sure you can pay off your entire balance each month and never use more than 30% of your credit limit. So, if your credit limit is $1000, never spend more than $300 on your card per billing period.
This also means that if you would normally buy something with cash, use your secured credit card to pay for it and then pay it off as soon as you get your bill. A good use for a secured credit card is to use it to pay a monthly bill that you have set up on auto-payment. Then set up an auto-payment with your actual bank account to pay the credit card. That way you never have to think about it, and you’ll be automatically building your credit.
Once your credit score starts to improve, you should consider adding an installment account, such as a car loan, to your credit. The combination of the two will do wonders for your score as long as you pay your bills on time and clean up the rest of your credit report.