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.

Secured credit cards are an amazing tool used to rebuild or establish credit for those who are looking to set themselves up for a healthy financial future. Here is what we will quickly discuss about secured credit cards to make sure you are educated when you walk into your bank and the over-eager banker behind the desk, hands you a packet of credit card options that they know are just perfect for you.

• What is a secured credit card?
• What kind of deposit is required on a secured credit card?
• How will a secured credit card help my credit in the future?

What is a Secured Credit Card?

To begin, a secured credit card is just that, secured. This means it is a type of debt that is secured or held by money that the borrower (you) has put down. This typically looks like a small deposit that you put down upfront that becomes your new credit limit.

For example, when applying for a traditional (unsecured) credit card, the institution runs your credit and determines they will give you a $1000 limit on your card. You do not provide them with this $1000, but it is yours to borrow up to each month as your spending limit on your card. With a secured card, however, you typically will provide this money upfront, and the institution then uses this as your limit.

This puts the lender (the bank or institution) in a more secure position. If you don’t pay your bill, for example, then they would keep that deposit, and it provides much less risk to them. This is why secured cards are used for people with no credit or “bad” credit, as an alternative to a traditional credit card.

Deposit Needed to Open a Secured Card

So, you may be wondering, what kind of deposit would be required on a secured credit card? The short answer is, that it varies greatly by institution. However, a few of the most popular cards, namely Capital One, Discover, and First Progress range from $49-$2000.

Sometimes lenders will allow you to choose your deposit, others will give you a range and allow you to pick within that range. Typically they are around $200. It is important to remember, however, that these deposits do become your credit limit on the card. So, while choosing a very low limit at first may sound very enticing, it isn’t beneficial to choose a low limit only to spend 100% of your limit every single month you have the card.

How a Secured Card Can Help Improve Your Credit

The best part is, now that you know what a secured credit card is, and what kind of deposit is typical, you can start to see some benefits on that good old credit report. We all know that building or rebuilding credit is not something that happens overnight, but with a few small steps, you can get on the right track to setting yourself and your credit up for future success.

By paying off your secured credit card in full each month as well as making only a few small purchases on the card each month- you will start to see a boost in your credit in as little as one year.  At this point, you would be able to consider the options of applying for an unsecured credit card with a higher limit, and of course, continuing to build your credit over time.

Secured credit cards are the perfect option for people who are just starting to build or rebuild credit. Think of them as a credit card with training wheels. It provides you with a practice credit card with a lower limit, to get the hang of paying a credit card bill, spending within your limit, and checking your credit score. By establishing these habits, paying the card in full each month, and spending below your limit- you will be able to get approved for an unsecured credit card in no time.

Have questions about your credit score or need help building your credit?

Contact Credit Absolute for a free consultation!