The frustrating thing about credit cards is that, in order to get a credit card, you have to have reasonably good credit. But the only way to build a solid credit history is by establishing a pattern of responsible credit card use.
See the dilemma? If you have bad credit, or even no credit, it can be difficult to get back on solid ground, credit-wise. One way to bounce back from credit problems is to use a secured credit card. When used responsibly, a secured card can help boost your credit score – and pave the way to a traditional credit card.
Want to make sure you get the most credit-boosting bang for your secured-card buck? Here are some things you should know about choosing and using a secured card.
Secured vs. Unsecured: What’s the Difference?
Secured credit cards are designed specifically for folks with bad or no credit. A secured card works almost exactly like a traditional, unsecured card, with one major difference: Unlike traditional credit cards, secured cards require you to put down a deposit – usually between $200 and $2,000 – as collateral (this collateral provides the bank with a little extra peace of mind since folks with a lower or non-existent credit score are viewed as a higher credit risk.) Your deposit also determines your credit limit, so if your deposit is, say, $1,000, that would be the limit on your secured card.
In most cases, people use secured cards for a set amount of time – usually around a year – to improve or establish their credit history and credit score. After that, many secured cards can be converted to unsecured cards.
Choosing a Secured Card
Not all secured credit cards are created equally. When it comes time to pick the secured credit card that’s right for you, it’s helpful to know what to look for. Here are a few tips for choosing a card:
- Watch out for scams or too-good-to-be-true offers. Avoid applying for a secured card from a company that makes you call a 900 number for information. And steer clear of any company that claims anyone can qualify for a card – regardless of credit history. And finally, if the offer is from a company you’ve never heard of, do some research. Look for red flags, scam alerts, or negative reviews from past customers.
- Make sure your activity is reported to all three credit reporting bureaus. The whole point of a secured card is that it can help you build or rebuild your credit. If your spending and payment history information isn’t getting to the three reporting bureaus, you’re wasting your time.
- Find out if you can earn interest on your deposit. If you have to put down a thousand bucks or so as collateral for your secured card, you should at least be earning interest on that money. Look for a card that lets you earn a little extra cash while you rebuild your credit.
- Shop around for the best fees and terms. There are lots of legitimate secured cards out there, so it’s in your best interest to do some comparison shopping. For example, although secured cards will have higher interest rates than traditional unsecured credit cards, you can still shop for a card with a slightly lower rate (interest rates on secured cards can range from 17 percent on the low side all the way up to 25 percent on the higher end).
It’s also a good idea to compare application fees, annual fees, and fine-print details like grace periods.
- Ask about making the move from secured to unsecured. The ultimate goal of a secured card is to build up your credit enough to qualify for an unsecured card. Before you choose a card, ask your prospective lender if they will allow you to transition from one type of card to another. Most will require you to demonstrate one year of responsible credit use before making the switch. Pass on any card that doesn’t offer that option.
Using a Secured Card
Once you decide on a secured card, it’s time to think strategy. In other words, it’s time to come up with a plan for exactly how you’re going to use your card to boost your credit score. Here’s a foolproof plan for making the most of your secured card:
- Use your card to pay one small-ish bill per month. You can’t build your credit history if you don’t use your secured card – but on the other hand, you don’t want to use your new card to go on a spending free-for-all. One great way to strike the right balance of regular use and responsible spending is to use your secured card to pay for one bill every month. Choose something small and easy to pay off (like your Netflix subscription). To make things even easier, set up a recurring auto-payment so you don’t even have to think about using your secured card.
- Pay your balance in full every month. By paying your entire balance off every month instead of simply paying the minimum payment, you’ll avoid incurring any interest charges – and you’ll still build a credit record.
What’s more, not carrying a balance is a great way to demonstrate that you are capable of responsible use. This also guarantees that your credit usage stays at a minimum (most banks like to see credit usage at 30 percent or less).
- Keep an eye on your credit score. After you’ve established a few solid months of use and payment on your secured card, check your credit score. You may find that it’s gone up a few points, which should be a sign that your credit is headed in the right direction. You’re entitled to one free credit report per year from the three major reporting agencies – so there’s nothing to lose!
Keep Up the Good Work!
When it comes to rebuilding or establishing a good credit history, there’s no such thing as a quick fix. But a secured card can provide folks with bad or no credit with a much-needed bridge to the world of traditional credit cards. If you choose a secured card, just remember to choose your card wisely – and use it responsibly. Good luck!
Need debt advice? Have questions about the best way to get out of debt and strengthen your credit? We can help. Contact the Debt Guru team today for a free debt consultation.