Consider a Secured Credit Card
Summary: Do you need to improve your three-digit FICO credit score this year? Applying for a secured credit card can actually help. Click through for the details on this important but little-known option.
A secured credit card acts much like a traditional credit card. You can use a secured credit card to make purchases. You then pay back what you charge. If you pay back everything you charge on or before your due date and carry no balance from month to month, you won’t be charged interest.
What is the one difference between traditional and secured cards?
With a secured card, you must first put down a deposit with the bank or credit union issuing your card. That deposit becomes your credit limit.
If you provide a deposit of $600, your secured card’s initial credit limit is that same $600. You can only charge up to that amount.
If you want to make $800 worth of purchases? You can’t.
Secured credit cards are easier to get
It’s easier to qualify for a secured credit card, even if your three-digit credit score is weak. That’s because such a credit card is less of a risk for lenders.
Say you qualify for a secured credit card and put down a deposit of $700. If you charge $150 during your billing period and don’t pay that amount back, your bank can simply take the money it is owed from your deposit.
Banks or credit unions don’t have to worry about you not making your payments, because you have already provided them with the funds they can access if you don’t make these payments. Because of this, financial institutions are more likely to approve your application for a secured credit card even if your credit score is weak.
How can a secured card help your credit score?
You can use a secured credit card to help improve your credit score. It’s all about making your payments on time and not running up debt that you can’t pay off.
Your card provider will report every payment you make to the three national credit bureaus: Experian, Equifax and TransUnion. If you make your payments on time each month, your credit score will gradually but steadily increase.
It’s important to not run up more debt than you can afford to pay off in full on or before your card’s due date. If you carry a balance, you’ll be hit with the high interest that secured cards charge, often as high as 29%. And if you carry too high of a balance on your card and use too much of your available credit, your credit score will fall.
Your best move is to use your secured card to make purchases that you can pay off in full on or before each due date. That way, you get the benefit of on-time payments without the negative of watching your credit card debt grow because of high interest rates.
If you use your secured card properly, making your payments on time each month, your credit card provider might even approve you for a higher credit limit or a traditional credit card that doesn’t require a deposit.