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How a Secured Credit Card Can Help You Build Credit

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When you have bad credit or no credit history at all, it can be nearly impossible to get approved for a traditional credit card. But that doesn’t mean you’re out of options. Getting a secured credit card is a great way to start building a strong track record of good credit. Let’s take a look at what secured credit cards are, how they work and how you can use one to improve your score.

What is a secured credit card?

For the most part, secured credit cards function like a traditional credit card. The difference is that credit limits on secured cards are generally lower, the fees are generally higher and — here’s the important part — they are backed by a security deposit.

You have to apply for a secured card just like any other credit card. But once you’re approved, you’ll need to provide the bank with a security deposit, which is usually a few hundred dollars. In return, you’ll receive your credit limit, an amount that’s typically between 50% and 100% of your deposit amount.

From there, the process is the same as any other card. You make purchases using the card, receive statements listing those purchases and are expected to make payments on the balance every month. This activity gets reported to Experian, TransUnion or Equifax, the three major credit bureaus, which helps you build your score.

Meanwhile, the bank holds your security deposit as collateral. If you miss payments, the bank can apply that deposit to your balance.

Be warned: Missing payments can result in high fees. Since those with poor or nonexistent credit are seen as higher risk than others, the service charges on secured cards are often higher than they would be with an unsecured card. Be sure to read your cardholder agreement thoroughly before signing up for a card so you know what you’re agreeing to.

How to use your secured credit card to boost your credit

A secured credit card can help improve your score by giving you a chance to establish a better credit history at comparatively little risk to the lender. If you develop good credit habits, you can make real improvements to your credit history in just a few months. Here are some tips on how to effectively grow your score.

Open your card where you have history

“It’s best to open your card wherever you have your checking and savings accounts,” said Karen Lee, a certified financial planner and the founder of Karen Lee and Associates in Atlanta, Ga. “Having history somewhere can help you get approved, especially if you’ve been turned down for cards before. You may even be given a better credit limit than you would otherwise.”

Pay your balance in full each month

Paying off your balance in full — and on time — each month is the key to building stellar credit. Not only will it keep you from incurring extra fees, it shows the credit bureaus that you can be trusted to pay back what you owe. If you can establish a proven track record of paying back smaller balances each month, it won’t be long before you qualify for higher credit limits.

Use the card only as much as you need to

Credit utilization, or the percentage of your credit limit that you use each month, also plays a role in determining your score. While you need to make sure to use your card every month to establish a history, ideally, it’s best to use under 20% of your total available credit. In addition to falling in line with what the credit bureaus want, keeping your balance low will make it easier to pay off in full each month.

Switch to an unsecured credit card when you can

After about 12 months of using your secured card and diligently paying it off, it’s time to start looking at your score. If your credit score is above 650, you have a good chance of being approved for an unsecured card. If it’s above 700, you may be ready to make the switch.

Switching to an unsecured card may allow you to avoid limitations that come along with having a secured card. However, once you make the switch, it’s still important to keep practicing good credit habits to make sure your score stays in good shape.

If a secured credit card isn’t for you, consider applying for a personal loan. If you’re able to make the monthly payments, a personal loan is another good tool for building a positive credit history while climbing your way out of debt.


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