Using A Secured Credit Card To Build Credit
If you’re looking to build your credit, using a secured credit card can be a great option. With a secured credit card, you’ll make a deposit that acts as your line of credit. This means that if you default on your payments, the issuer can simply keep your deposit.
However, because the issuer knows they have this security net, secured cards often come with fewer fees and lower interest rates than unsecured cards.
And, if used responsibly, a secured card can help you establish or rebuild your credit history. Below, we’ll explain how secured cards work and offer some tips on using them effectively.
How Secured Cards Work
When you apply for a secured credit card, the issuer will require you to make a deposit. This deposit is generally equal to your credit limit. So, if you deposit $500, you’ll have a $500 credit limit.
Once your account is opened and your deposit is made, you can use your card just like any other credit card.
You’ll make purchases and then pay off your balance each month. As long as you make your payments on time and in full, you’ll start to build positive credit history. And, over time, you may even be able to transition to an unsecured card.
Types Of Secured Cards
There are two main types of secured cards: traditional and prepaid. Here’s a quick overview of each:
Traditional Secured Card: With a traditional secured card, your deposit is held by the issuer as collateral. This means that if you default on your payments, the issuer can simply keep your deposit.
Prepaid Card: A prepaid card is not a true credit product. Instead, it’s more like a debit card that’s loaded with funds by the cardholder.
Because there’s no credit line associated with a prepaid card, there’s no risk for the issuer if you default on your payments. As such, prepaid cards generally don’t help build credit.
Using A Secured Card Responsibly
If you’re looking to use a secured card to build credit, there are a few things you’ll need to do:
1. Make sure the issuer reports to the credit bureaus: Not all issuers report to the credit bureaus. So, before you apply for a card, make sure the issuer reports to at least one of the major credit bureaus.
2. Use your card regularly: To build credit, you need to show that you’re using your credit responsibly. One way to do this is to use your card regularly and pay off your balance in full each month. If you only use your card occasionally, it may be difficult to build positive credit history.
3. Avoid using too much of your credit limit: Another important factor in your credit score is your credit utilization ratio. This ratio measures how much of your available credit you’re using.
So, if you have a $500 credit limit and you regularly charge $400 to your card, your credit utilization ratio would be 80%.
Ideally, you want to keep your credit utilization ratio below 30%. So, if you’re using a secured credit card to build credit, make sure you’re not charging more than $150 to your card each month.
4. Make your payments on time: This one should be obvious. But it’s worth repeating: To build good credit, you need to make all of your payments on time, every time. Even one late payment can damage your credit score.
5. Keep your account open: Finally, once you’ve opened a secured credit card and started building positive credit history, it’s important to keep your account open. The longer your account is open, the better it will be for your credit score.
If you follow these tips, you should have no problem using a secured credit card to build credit. Just remember to be patient.
It takes time to build good credit. So, don’t expect miracles overnight. Just use your card responsibly and let the positive history accumulate over time.
Conclusion
If you’re looking to build credit, a secured credit card can be a great option. Just make sure you use your card responsibly and let the positive history accumulate over time.
With a little patience, you should be able to transition to an unsecured card and enjoy all the benefits that come with good credit.
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