A great tool for building credit is a secured credit card. Whether you have no credit or you are simply looking to rebuild your damaged credit after some tough financial times, signing up to get a secured card is a smart way to help your credit get back on track. Your financial history won’t be held against you with a secured card, and all borrowers are approved.
So how can a credit card issuer approve everyone who applies? That’s simple. Secured cards require a deposit of typically $200 to $300. If you can meet this deposit, you’ll be approved for the card. The deposit is your credit limit, but it will be returned to you with interest once you’ve canceled the card.
How Do Secured Cards Help Improve My Credit?
When you make purchases and pay your bill on time, the credit card company will report your account to the three major credit bureaus, along with your payment status, thereby building a positive credit history.
Charge no more than 10 percent of your credit limit as you build up your credit. If you have a $300 credit limit, spend no more than $30 per month. When it comes to a secured card, you need to think small. You can treat yourself to a lunch or two, but that’s it for the month. Or charge a small purchase that you would make every month anyway; use your secured card for your Netflix bill and nothing else. Your secured card is supposed to be a tool for building your credit.
Charging only $10 or $20 each month may seem inconsequential, but it can do big things for your credit score when you make sure to pay those small balances in full each month.
How Can Small Purchases Help?
The FICO credit score is the standard credit-scoring model that lenders use. Thirty-five percent of the points that make up your overall FICO credit score is based on your past payment history, so establishing a solid payment history is a necessary first step if you want to improve your credit score. Paying your secured card bill and any of your other bills on time each month will give you a solid payment history.
Revolving utilization—the amount of a credit card’s limit that you are currently using—can be determined by dividing your card’s balance by its credit limit and multiplying that by 100. Each of your cards is scored separately and then collectively. Every credit card account has a credit limit and a current balance.
For example, you have a $300 credit limit and a current balance of $15. Divide 15 (your current balance) by 300 (your credit limit) to get 0.05. Multiply 0.05 by 100 to get 5 percent. You are therefore using 5 percent of your credit limit and have a healthy revolving utilization. The lower your revolving debt utilization is, the more points you will receive on your credit score.
How Can Large Purchases Hurt?
Making a large purchase on a secured card that has a low credit limit, however, will actually hurt your credit. For example, you charge $275 on that same secured card with the $300 credit limit. Charging so close to your limit will deduct points from your total credit score, even if you make sure to pay your balance in full that month. Since you are using a secured card to build credit, keep those purchase amounts as low as you can.
After six months to a year have passed with responsible use of your secured cards, your credit score will have improved, and you may now be eligible for unsecured cards that don’t require a deposit. Your current secured card issuer may even offer you an unsecured card. If they don’t offer this, make sure to ask for one. Don’t be afraid to look around for other offers either. You deserve a good deal after all the hard work you put into building up your credit score.
