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Using a Secured Credit Card to Build Credit

dcCred — Fri, 10 Jun 2022 18:14:13 +0000

To get the best terms when purchasing a car or house, applying for a personal loan, or buying a new phone your credit score comes into play. Together with your credit report, your score tells the seller/lender your creditworthiness. Credit rating is based on your previous debt and how you managed it.

If you have a good and long credit history, you get favorable credit terms. On the other hand, without any credit to show or a report riddled with late payments and overdue debts, you’ll attract undesirable terms or not get approved at all.

So, how do you fix bad credit? One of the ingenious ways is using a secured credit card as explained below.

What Is a Secured Credit Card?

A secured credit card is just one of the broad categories of credit cards. The distinction is that, unlike traditional credit cards whose repayment is not guaranteed, the risk of defaulting on a secured card is reduced through a cash deposit.

The limit is equal to the deposit, meaning that the issuer assumes a very small risk. Additionally, the security makes it unnecessary for the issuer to ask for a credit report or attach a cap on credit scores when applying for a secured credit card.

How Much Is the Security Deposit for a Secured Credit Card?

Typically, the card requires the holder to deposit $200 to $300. However, some cards attract a deposit of just $49. The upper limit is around $2500 or more depending on the issuer and previous use of the card. What is important is to remember that the credit line is equivalent to the amount of money you put into the card.

Tips for Building Credit Using a Secured Credit Card

For the card to make a difference in your credit scores, you need to know how to use it wisely. The factors that go into credit rating calculations include; payment history, outstanding debt, new credit, credit mix, and the length of credit history. With this in mind, here is how to use a secured credit card like a pro:

1. Choose Your Card Wisely

Apart from the security deposit, you need to consider how much interest a credit card charges. The APR for secured cards is normally high and constant. It ranges around $24% or more which is in contrast to traditional credit cards that have an APR range of around 13.99% and 24.99%.

Another factor when choosing a card is the reward terms. Such include:

Zero charges on international transfers
Cash backs on restaurant and gas station payments
Zero annual fees

2. Use the Card

Basically, once you deposit the security, the issuer expects you to start using the card. Wise usage calls for not maxing out your limit. You also need to keep a low card utilization; the percentage of the credit you are using is against your limit. The ideal credit utilization for building credit is 30% and below.

3. Make Timely Payments

The whole point of getting a secured credit card is to create a stellar credit history. As such, you have to make timely payments on the card to avoid penalties that lower your credibility. Why? As a factor in credit score calculations, payment history weighs the most at 35% of the total score.

4. Graduate to a Traditional Credit Card

If you use the card diligently, then after a year or thereabouts, your credit score will get a much-needed boost. It follows that you’ll stand a chance of qualifying for better terms on other credit lines. At such a time, and considering that you’ll have learned to use credit wisely, apply for an unsecured credit card. Also, keep in mind that the APR for secured cards is high and could be unattainable for years on end.

The Takeaway

Secured credit cards are a godsend to individuals with no or low credit scores. It is easy to apply and get approved for the card and with the right usage; you’ll see your scores improve in 6 months or so. That said, the card comes with a high-interest rate and you must pay the deposit before the credit becomes accessible.

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Does getting rejected for a credit card affect your credit score?

dcCred — Sun, 23 Jan 2022 21:32:39 +0000

Disclosure regarding our editorial content standards.

Getting rejected for a credit card won’t directly hurt your score, but credit card applications can affect your score in different ways—whether you’re approved or not.

In this post, we’ll walk you through the credit card application process and how it affects your credit.

How can a credit card application affect your score?

A credit card application can impact your score in two ways: as a hard credit inquiry or as a new line of credit.

Hard credit inquiries

When you apply for most types of credit, the lender will look at your credit history to understand your creditworthiness. There are two types of credit inquiries: soft and hard.

A soft inquiry has no effect on your credit score (although it’s recorded). Checking your own credit score is an example of a soft inquiry.

A hard inquiry, on the other hand, is what happens when a lender checks your credit history when you apply for a loan or a new credit card. A hard inquiry won’t lower your credit score by itself, but too many hard inquiries in too short a time frame will.

Most of the time a credit card application requires a hard inquiry, leading to a potential drop in your credit score. Hard inquiries stay on your credit report for up to two years.

It’s important that you spread out credit applications throughout the year. The good news is that lenders always have to ask your permission when conducting a hard inquiry, so you can maintain control over how many hard inquiries are pulled and when.

A new line of credit

Although getting rejected for a credit card won’t lower your credit score, getting approved might. Your credit score is made up of five factors:

Payment history (35%)
Credit utilization ratio (30%)
Credit history length (15%)
Credit mix (10%)
New credit (10%)

When you get new line of credit, such as a new credit card, your credit score may slightly decrease. Don’t worry, though—this decrease doesn’t usually last long.

Why your credit card application was denied, and what can you do about it

When you’re denied credit, the lender is legally obligated:

To tell you why through an adverse action notice
To tell you how to see the credit report they used to make their decision

You can access free copies of your credit report at annualcreditreport.com to understand what the lender saw.

Depending on why your application was denied, there might be steps you can take to increase your chances for approval in the future. For example, if your credit utilization is too high, you can spend just a few months bringing down your credit ratio.

But if you were rejected because of something more serious, like a recent collections account, you may have a hard time getting approved for years. That’s not to say you can’t work to improve your credit—it just may take more work.

For what it’s worth, lenders don’t only check credit. They might also care about other factors, such as your debt-to-income ratio and employment status. Having a steady job and an income shows that you can reliably pay your bills.

Here are some other items that could potentially cause a rejection:

1. Missed or late payments

Lenders can report missed or late payments to the credit bureaus 30 days after the first payment deadline. These can reduce your credit score and stay on your credit report for up to seven years.

What you can do about it: The first step is to examine your report and make sure all the missed or late payments are entirely accurate.

If even a tiny detail, such as the amount, date or lender’s name, is wrong, you can dispute the negative item.

The next step is to do whatever you can to make sure you never miss another payment: schedule reminders, set up auto-payments—whatever you can. Your payment history makes up 35 percent of your credit score, so building up a good record is key.

2. Several hard inquiries

If you’ve ever shopped around for a car or a new credit card, you may have racked up several hard inquiries in a short time. Hard inquiries stay on your credit report for up to two years, but stop impacting your credit after a few months to a year.

Multiple hard inquiries in a brief period can make it seem like you were desperate for credit or were being rejected by many lenders.

What you can do about it: The most important thing you can do is wait this period out. You should see your credit score bounce back after a few months. While you wait, don’t apply for any new credit so your credit score doesn’t drop further.

A rule to try to stick to in the future is to only allow for a hard inquiry once every six months—at most.

3. High credit utilization ratio

Your credit utilization ratio is the second most important factor, accounting for 30 percent of your credit score. Credit utilization is the amount of credit available to you versus the amount you use every month.

Generally speaking, a credit utilization ratio above 30 percent will negatively impact your credit score. So, if you have two credit cards with a credit limit of $5,000 each and you spend, on average, $3,100 per month on the cards, your credit utilization will be high at 31 percent.

Note that it doesn’t matter if you pay off the credit in full every month. Credit utilization exclusively looks at what you use, even if you pay it off.

A high credit utilization ratio makes you look much riskier to future lenders. Using too much credit can imply you’re living beyond your means or can’t control your spending.

What you can do about it: You can get your credit utilization down in a few ways. The first is to try to spend less on your credit cards, if you can.

The second is to increase the credit available to you. If you can open a new credit card or increase your current limits, your utilization will decrease.

For example, in the above example, let’s say one of the cards was to rise to a limit of $6,000. Spending $3,100 out of $11,000 now puts you at a healthier credit utilization of 28 percent.

4. Insufficient credit history

The longer your credit history, the better lenders can understand your borrowing habits. If you have a thin credit profile—maybe you just turned 18—it can take time to build up a credit history. Unfortunately, until that happens, your thin credit profile can work against you.

What you can do about it: One of the most critical rules in building up your credit history is to leave your oldest credit cards open. Even if you don’t use the card, leave the account open. Your credit history only goes back to your oldest account.

Don’t worry—as time goes on, your credit history will build up.

Increase your chances of getting approved

You can also increase your chances of getting approved for a new credit card by:

Securing a preapproval first. Many lenders offer a preapproval based on a soft inquiry into your credit. They’ll look into your credit and give you preapproval for the credit card. Ultimately, preapprovals aren’t guaranteed, but they’re often a good indicator of whether you can get the credit card. If you find out you’re not preapproved, you can save yourself from applying and getting a hard inquiry on your credit report.
Research what cards you’re more likely to be approved for. There are many types of credit cards out there. It’s essential to be honest with yourself and understand that you might not qualify for top-tier credit cards if you have poor credit. Instead, look for credit cards that have lower requirements. You can work on improving your credit in the meantime and eventually work your way up to better credit cards.
Check your credit score and reports regularly. It’s important to check your credit score and reports often. You can watch your credit improve and know when you have a better chance of credit approval. Additionally, you can monitor your credit report and dispute any incorrect items that show up on your report.

Improving your credit can take time, but it’s worth it. As you work to build your credit, you’ll learn many healthy financial habits that will help you in the future.

If you need help with credit repair and don’t know where to start, you can consider professional services. The credit advisors at CreditRepair.com can help you evaluate your credit reports, dispute any false negative items and keep your credit as accurate as possible.

Reviewed by Leikeisha Finai-Jones, Credit Consultant at CreditRepair.com.

Leikeisha Finai-Jones joined CreditRepair.com back in 2020 as a social community coordinator. Leikeisha knows how the credit industry works and how what pitfalls consumers need to look out for—Leikeisha mastered the skill of problem-solving even in tough situations involving identity theft, credit repair and other issues. Leikeisha has seen it all, and knows how consumers can make the most of their rights to boost and protect their credit.

Note: The information provided on CreditRepair.com does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only.

The post Does getting rejected for a credit card affect your credit score? appeared first on CreditRepair.com.

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How to apply for a credit card (and get approved) in 8 steps

dcCred — Sat, 22 Jan 2022 21:20:03 +0000

Disclosure regarding our editorial content standards.

Applying for a credit card is a lot like applying and interviewing for a job. You need to do your research, make sure you’re a fit, meet all the requirements, and then wait on a verdict. All of this can be overwhelming. Read on to learn more about how to apply for a credit card, and more importantly, how to get approved.

1. Check on your credit score

The first, and arguably most important, step when applying for a credit card is to check your credit score. This can help you decide whether or not now is the right time to apply for a new credit card or if you should wait a little longer to build your credit score before applying for a new credit card. A good credit score is generally above 650, and a score in the “good” to “excellent” range is likely to help your approval odds.

2. Decide what card is right for you

Deciding on the best credit card for you comes down to thinking about your wants and needs. If this is your very first card, apply for one with low fees and interest rates, with a high approval odds. If this is your second or third card, could look into a more exclusive premium or rewards card to earn extra incentives when making certain purchases.

Below are a few different types of credit cards that you may consider based on your financial needs and wants.

For your first card:

Secured credit cards are good for those who don’t want to go overboard on spending, as they require a cash deposit that the lender holds as collateral for making on-time payments.
Student cards are designed for college students or young adults just beginning their financial journey, with low credit limits and limited to no rewards.

For a second or third card:

Premium cards are reserved for high spenders that want exclusive perks for card usage, such as access or first dibs to special events.
Rewards cards are best for those who want to earn incentives every time they use their card for certain purchases, such as travel points, cash back or other cardmember exclusives.

3. Look into pre-approval odds

Because applying for a credit card requires a hard inquiry into your credit history (that reflects on your credit score), you may want to look into credit cards you’re pre-approved for before beginning the application process. The pre-approval process performs a soft inquiry into your credit background that does not affect your credit to see if your score and other information are aligned with the credit card’s approval criteria.

A pre-approval is not a guarantee that you’ll end up getting approved when you actually apply, but it can be a helpful indicator to see if this is the right card for you.

4. Familiarize yourself with the terms of the credit card

There are a number of different terms and conditions that are important to understand when applying for a credit card, as they can determine how much you’ll owe.

Below are some commonly used terms used for credit cards that can help you decide whether this is the right card for you, so you aren’t surprised when it comes time to pay your credit card bill.

Annual fee: a once-yearly fee charged by the card issuer that allows you to collect any earned rewards from the past year. Many cards waive this fee the first year you’re with them, or they don’t charge one at all.
Annual percentage rate (APR): the rate of the total annual cost of any interest carried on your card from month to month. This charge occurs when you don’t pay your credit card balance in full each month, and can vary depending on the amount you currently owe.
Minimum interest charge: this refers to the least amount of interest you are charged if you carry a monthly balance on your credit card
Late fee: a fee charged by your card issuer when you fail to make a monthly payment by the due date

There are additional credit card fees and charges that vary depending on the card issuer and the exact terms of your card agreement.

5. Meet the card application requirements

Understanding the credit card approval requirements that you’ll need for your application can help make the process easier.

Generally, you’ll need the following to apply:

Date of birth
Full name
Current citizenship
Contact information such as a mailing address, phone number and email address
Social Security number or Tax Identification Number
Checking account information
Employment status and annual income
Monthly mortgage or rent payment costs

6. Apply online, in person, over the phone or via mail

Upon applying for a credit card, you have a few application options available depending on your situation and needs.

Applying online through the card issuer’s website is typically the easiest and most convenient way to apply and generally gives the quickest response or even an immediate approval.
Applying in person allows you to ask questions to a representative during the application process and may ensure a quicker application processing time. However, this also means finding a physical location of your lender and applying during regular business hours.
Applying over the phone means you get to apply from the comfort of your home and ask questions to a representative, but that also means the inconvenience of hold times and applying during regular business hours.
Applying via mail is the least efficient method of applying for a credit card, as you’ll need to add on the time it takes to reach your lender, their application processing time and the time it takes for their decision to be mailed back to you.

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7. Brace for an impact to your credit score

A credit card application requires a hard inquiry into your credit history, which does cause your score to take a slight dip—but the impact should be minimal as long as you’re just applying for one card. You can feel confident that your slight score decrease will rebound quickly once you’re approved and start using your new credit card.

A new credit card also lowers the overall age of your credit and impacts your credit utilization ratio (the amount of credit you owe compared to the total credit limit you currently have). As both of these factors are used to calculate your credit score, your credit score may decrease if you rack up a large amount of debt at one time on your new card.

8. Prepare a repayment strategy

But the work doesn’t stop after you’ve sent in your credit card application. It’s important to have a debt repayment strategy.

Here are some tips to get you started on a positive note with your new credit card:

Aim to keep your credit utilization ratio under 30 percent (meaning you owe less than 30 percent of your total credit limit)
Try to keep as low of a balance as possible to avoid hefty interest charges
Pay close attention to your credit report to report any fraudulent charges, should they happen
Pay more than the monthly minimum charge each month when possible

Frequently asked questions about credit card applications

How soon do I hear back regarding my application?

Responses for credit card applications vary depending on the issuer and the type of credit card you’re applying for. Response times can go from instant approval to a few weeks; the most common wait times are around seven to ten business days.

Your method of applying can also have an effect on how soon you hear back. If you apply online and meet all of the application requirements, you can get approved within minutes, but if you apply via mail, you may be waiting anywhere from a few days to a few weeks to get your decision.

What if my application is denied?

Even if you’re pre-qualified and meet the requirements, some credit card applications get rejected for a variety of reasons—a negative credit history, no recent income or a recent hit to your credit score can all impact your application being denied.

Luckily, per the Fair Credit Reporting Act, credit card issuers are required to inform you why they rejected your application (known as an “adverse action notice”). You can expect your notice to arrive seven to ten business days after your application was denied.

It’s important to remain positive after your application was denied. Know that you have options. Continue to research which credit card best fits your needs, and study your adverse action notice to see what you can improve on your next application.

How many cards should I apply for at one time?

Technically, you can apply for as many credit cards at one time as you want. However, doing so will generate multiple hard inquiries at one time, which will not only hurt your credit score but can also be a red flag for lenders in the future.

Each application results in a separate hard inquiry into your credit, so multiple hard inquiries at once or over a short period of time can all compound and bring your credit score down by quite a few points.

There’s no right answer for how long to wait between credit card applications, but to be cautious you may want to wait three to six months between applications to allow your score time to bounce back from a hard inquiry.

Applying for a credit card is an important piece of your financial journey. Knowing how to apply is just one step in the credit-building process that can lead to more opportunities that allow you to rebuild and work on increasing your credit score. CreditRepair.com is here to help and support you in achieving your personal financial goals.

Reviewed by Upuia Sagapolu, Credit Consultant at CreditRepair.com.

Upuia Sagapolu has worked in credit repair for over 17 years. She has a great wealth of knowledge and wisdom concerning the credit repair process. Upuia champions herself as a strong advocate assisting all hard-working Americans towards increasing their credit scores and achieving their financial goals. She is a firm believer that having great credit is essential to a person’s credit journey, which is their financial power that leads to their financial freedom.

Note: The information provided on CreditRepair.com does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only.

The post How to apply for a credit card (and get approved) in 8 steps appeared first on CreditRepair.com.

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