How a Secured Credit Card Help Improve Your Credit
Whether you are trying to clean up a financial mess that you have made in the past, or you are looking to establish your credit, a secured credit card is a useful and often underutilized tool. A secured credit card, when used properly, is an effective and great way to build a positive credit score and establish a positive financial history.
Unfortunately, there isn’t any magic spell designed for credit improvement when it comes to secured credit cards. Because everyone’s experience is unique, exact timelines vary. That said, many people have been able to see an improvement to their credit score in as little at six months to a year. Depending on your exact situation, it might take longer to see the amount of change you really need. But don’t get discouraged if that happens, in the end, it will be worth the extra time.
How Does a Secured Credit Card Work?
Secured credit might seem a little daunting at first, but it really isn’t as complicated as many people assume. A secured credit card is the exact same as a regular credit card, however, it has to be secured by a deposit. This deposit then acts as collateral in case you don’t make your payments. Generally, these deposits range between $200 and $1000, and your credit limit is usually the same amount. Other than having to make that initial deposit, you can use a secured credit card the exact same way you would like any other one.
Why Chose a Secured Credit Card?
Now, at think point, you might be asking, “Why would I use a secure credit card, if it essentially works the same as any other kind of credit card?” A fair question, but the truth is, secured credit cards are perfect for people who are having difficulty qualifying for a regular credit card. Often poor financial decisions from the past prevent people from getting new credit. This is when a secure credit card can be incredibly helpful. The financal deposit that is required for a secured credit card reduces the risk for the credit card company. This then allows them to approve people who typically would be declined.
Furthermore, if you don’t have any credit history, then you might also have trouble finding a financial institution or credit card company that will approve you for new credit. However, because of the deposit that is associated with a secured credit card, you will again be more likely to be approved – even if you have no credit history at all. People who have no past experience with credit often find that they benefit the most from secured credit cards. This is because secured credit is a fantastic financial stepping stone. It is an option that provides second chances and allows the cardholder to build their credit from the ground up.
How Will a Secured Credit Card Actually Improve Your Credit Score?
Building or re-establishing your credit with a secured credit card is the exact same as building your credit with a regular credit card. Responsible spending is your goal. This means you should never max out your card – and only buy items you know you can actually pay for with the cash you have in your bank account. Ideally, you should aim to keep your credit utilization rate low. In other words, you should only use a small percentage of your available limit. Many finance experts say to keep your balance between 10 and 30% – especially if you are trying to build your credit after past financial mistakes.
Payment history is also essential when it comes to improving your credit score. Your payment history is the most significant contributing factor to the calculation of your credit score. If you do not make your payments on time, and in full, your score will suffer significantly. And because you have a secured credit card, you might not even get your deposit back.
What If You Have Bad Credit?
Bad credit is a tricky problem. Even more so if you have any delinquencies or collection accounts, but don’t give up all hope yet. A secured credit card will help you turn your financial situation around. As stated earlier in the article, however, it just might take more time than you would like. There are multiple things you can do to help your credit improve, both during your application process, and once you have your secure credit card.
- If you have other maxed-out credit cards, stop using them and set up a payment plan.
- Get informed about your own finances. This means requesting a copy of your credit report, checking for any errors and finding out what your credit score is.
- Create a budget and begin tracking your progress – every day, for every penny you spend.
- Use your secured credit card in an intentional and responsible manner. This includes paying it off in full and on time – every single month.
Keep in mind that secured credit cards do not impact your credit score any differently than regular credit cards. This means that it is your responsibility to work hard and improve your credit score and paying off your debts.
The most critical step in improving your credit score; whether it is with a secured credit card or a tradtional one, is accepting the responsibility and starting the process right away. Let’s be realistic – it isn’t going to be fun. But, the sooner you begin to do this, the sooner you’ll be on your way to a better financial future. In many ways, your credit score is the heart of your financial life. Like your real heart, treat it well, and you’ll reap the benefits.