Build Credit with a Secured Credit Card
Many of us have trouble with the idea of using a credit card to build credit. Credit Cards are dangerous to some people, and many of us have experienced trouble with them. But if managed correctly, using a Secured Credit Card will build credit scores fast – at the least faster than most other opportunities to do so – and for that reason using a secured credit card is the most common method used to build credit.
Secured Credit Cards work just like a Traditional Credit Card, except they require a cash deposit that serves as collateral if the card’s monthly payment is not made on time. Most of the time, the initial deposit amount is also the introductory credit limit. The credit limit can be raised over time without adding additional funds, and eventually the entire deposit may be allowed to be refunded.
Now, there are moments in life when we are willing to bend over backwards to build good credit, but using a secured credit card to build credit is a pretty straightforward proposition. The most important element to building credit through any type of credit card is to manage it correctly. There are 3 major “To Do’s” you must adhere to if your goal is to add points to your score:
- Always maintain a balance on your credit report that is less than 30% of the credit limit.
- Never “flat-line” the card, or let it report a zero balance month over month. This will indicate non-usage, and you will not be rewarded for not using the credit card. Although credit reporting agencies are beginning to consider the amount of payment you make every month, which will give credit scoring opportunities for full payments, the FICO scoring model does not currently account for this (as of May 23, 2014 – we expect it soon will, but as for advice relevant to today: keep a small balance).
- Never, never pay late.
Before consumers apply for any Credit Card, especially a Secured Credit Card, shop around – and be aware of the opportunities in the marketplace for the best deal. It pays to read the fine print, and if you know the complete rules for how your credit card company works then you will pretty much know the rules for how you are going to increase your scores. Always compare the terms.
Here is what to consider:
- Compare the Annual Fees – There is no typical annual fee. Although the industry says the average annual fee is $75, you can find many with much lower annual fees, but you may have monthly fees too. APR (annual percentage rate) can help you identify the impact of fees. APR is a calculation that adds the required fee(s) to the interest rate. Look for cards with a small variance between interest rate and APR.
- Compare the Deposit – Generally speaking, the deposit amount is up to the consumer, but most Secured Credit Cards have a minimum deposit of $200 or so. Remember: the deposit will be your initial credit limit, and you only want to use 30% of it.
- Ask for the Refund Terms – Most secured credit cards are converted to unsecured credit cards after a period of good standing. But when and how that occurs is another variable. Also note that when the refund of your deposit is triggered, your credit card company will often apply it first towards paying down your current credit card balance.
- Reporting to Credit Agencies – When using a secured credit card to build credit scores you must ensure the credit card company reports to all three of the credit bureaus (many will only report to one). Read the terms of the agreement of call the credit card issuer if you have any question(s) about this.
- Pre-paid Credit Cards are not the same as Secured Credit Cards – Pre-paid Credit Cards will not build credit scores. Pre-paid Credit Cards apply money in advance to all charges occurred, while secured credit cards work more like Traditional Credit Cards.
What Credit Card Fees to be aware of ?
- Some cards charge an Activation Fee the 1st time you use the card. A Bankrate 2014 Prepaid Debit Card Survey showed that 53 percent of Secured Credit Cards charge an activation fee, with ranges from $2.95 to $9.95; but often the activation fee can be avoided if you activate the card online.
- Failure to use the card may result in an Inactivity Fee. Although most don’t have this fee, know the rules to the card you are choosing.
- Customer Service Fees are sometimes charged if you dispute or need an item researched. Although the Bankrate 2014 Prepaid Debit Card Survey indicated 73% of cards don’t charge this fee, you must research the full fee schedule.
Using a Secured Credit Card will build credit. It works.
We all know multiple stories of friends and loved ones who have ruined their credit and racked up too much debt with their usage of credit cards. Credit cards can be dangerous. But, for that very reason, if you properly maintain a Secured Credit Card, you will receive high consideration for your ability to manage credit.
Copyright 2014 John Regur All Rights Reserved – Originally Posted at: Tulsa Oklahoma Mortgages – John Regur