If you’re trying to rebuild your credit, you may have a frustrating puzzle to solve. You know using credit responsibly should increase your credit score, but you aren’t able to get access to credit in order to use it responsibly, since credit card companies won’t issue you a credit and lenders won’t issue you a loan…because you have a low credit score.
Luckily this puzzle has a solution, because there is a way to build your credit without a traditional credit card or loan. It’s called a secured credit card, and it could help you get your credit score back on track. All you need to know is how to use one the right way.
What Is a Secured Credit Card?
A secured credit card is a credit card backed by a cash deposit you make when you open the card. The minimum for the cash deposit will differ depending on the terms of your card, but it’s usually between $200 and $1000. The deposit will be the same amount as your credit limit. In other words, if you put $250 into the card when you first open it, your credit limit on the card will be set at $250. You will be billed for whatever you charge on the card, and if you don’t pay it off, the issuer will take what you owe them out of the original $250 deposit.
Why Use a Secured Credit Card?
Because the deposit reduces any risk to the credit card issuer, a secured credit card is usually available even to those consumers with poor credit. The credit limit for a secured card is much lower than the average unsecured credit card, because creditors don’t want to take as much risk on someone who has bad credit. Also, a secured card will have a much higher interest rate (around 19%) than many traditional unsecured credit cards. But if you pay it off in full every month, you won’t need to worry about it. This is why a secured card is a good choice for those who can’t qualify for a regular credit card.
If you’re able to afford the initial cash deposit when you open your account, most issuers will offer you a secured card regardless of credit history. The secured credit card still counts as credit, and is reported to credit bureaus. It can be used for the same purchases as an unsecured credit card, and even looks the same as other credit cards. If you make on-time payments and pay your secured credit card in full each month, you could even improve your credit score.
But keep in mind that the point of a secured credit card is to build up enough credit so that you can eventually apply for an unsecured credit card, which will have a higher credit limit and lower interest. This means you have to act as responsibly as possible with your secured card, since you are attempting to prove to a creditor that you are trustworthy.
How to Use Your Secured Credit Card to Build Credit
Once you have your secured card, it’s time to start using it. Be careful, though—there is a proper method to using your card wisely if you intend to build up your credit. If you follow these rules, you should be in good shape.
Don’t Overuse Your Card
You only need to make one or two purchases a month in order to successfully build credit, so it’s best to keep your purchases to a minimum. You don’t want to end up unable to pay off your balance at the end of the month. Watch your spending.
Only Use Your Card for Expenses You Can Afford
Don’t make large or extravagant purchases on your card. The purpose of a secured credit card is to help you demonstrate your trustworthiness, so you need to act responsibly with your purchases.
Pay Back Your Balance in Full Every Month
In order to avoid accruing interest on your balance, you should pay it off completely every month. This way you build your credit while avoiding paying interest, which is often higher on secured cards.
Set Up Auto-Pay So That You Never Miss a Payment
The best way to make sure you pay off your card every month is to set up auto-pay, which automatically deducts your monthly payments from your account. With auto-pay, you also don’t have to worry about keeping track of your bill.
Check Your Credit Score Regularly
Depending on how bad your credit was when you started, it may take several months to improve to a better rating. While there are no guarantees that you’ll be approved for a new card, many consumers qualify for an unsecured card after a year of using a secured card. Typically, credit card companies start to extend offers for unsecured credit cards when your credit limit is above 650. The higher your score, the more likely you’ll be approved.
Once Your Credit Improves, Apply for an Unsecured Card
After successfully building your credit score, you may be able to apply for an unsecured card from your creditor. Some card issuers will automatically approve you for an unsecured card as soon as you qualify. When you close your secured card, your original cash deposit will be returned to you.
Used properly, a secured card could help you rebuild damaged credit. While these cards shouldn’t be used long-term, they are a great way to demonstrate your creditworthiness and to begin practicing responsible financial habits. Once you’ve raised your credit score, it’s important to do your best to maintain and improve it. Need help figuring out how to do that? Read out article on how to improve your credit.