Learn How Secured Credit Cards Can Help Build or Rebuild Your Credit

Holding a credit card

There’s nowhere to go but up. In your quest to rise through the rungs of the credit ladder — from nonprime to prime for instance, you need to build a strong credit profile. Secured credit cards might help you reach that goal.

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What Makes Secured Credit Cards

Secured cards work just like your typical, regular credit cards. It’s just that a security deposit is needed in getting secured credit cards.

The main features of a secured card that it shares with all other credit cards are the following.

1. It has an interest rate which is what you pay every time you swipe or use your card. The credit card interest rate is also expressed as APR, or annual percentage rate.

2. It has a credit limit that is tied to your security deposit. The cash deposit typically starts at $200 and may be increased without additional cash deposit, all depending on the terms of the issuer.

3. It has a minimum payment which is what you are required to make on or before the due date. The minimum payment only satisfies a portion of the outstanding credit card debt and exists so you can avoid incurring late fees.

4. It has a repayment period or grace period in credit card terminology. If you pay off what you owed within this timeframe, you won’t incur finance charges. This grace period would depend on your card’s billing cycle.

Who Goes For Secured Credit Cards

Secured cards can be for anyone looking to improve their credit rating; it could take six months or longer to see a noticeable improvement.

This strategy to build or rebuild credit history is all the more useful to people:

  • Looking for greater credit opportunities.
  • Having little credit history.
  • Wanting to start a credit history.
  • Improving a poor credit history.
Shop and compare credit cards.

Wherever you may be in the credit spectrum, a good credit score is always beneficial. Think of this: the rate on any financial product is based on the prime rate, which is what banks charged the most creditworthy with.

As you bump your credit score, you are likely to qualify for a better rate. But, how do you increase your credit score with the use of a secured card?

Responsible Use = Credit Building

Secured credit cards are still credit cards. That means, the card’s opening date, its balance, and payment history will be reported to credit bureaus and reflected on your credit report.

This is the reason why secured credit cards help in building credit.

But, the credit building power of your secured card only works if you use it responsibly. This means:

  1. Paying your bills on time. Payment history takes up 35% of your FICO score and says a lot about your willingness to pay your debts. Make timely payments on your credit card to strengthen your payment history.
  2. Paying your balances in full. While making just the minimum payments is commendable, paying your balances in full is ideal. This keeps you from paying finance charges and makes for a healthy credit utilization.
  3. Keeping your credit utilization low. With a deposit tied to your credit limit, you are less likely to overspend. Still, it’s wiser to keep your purchases in check and ensure that your existing credit card debt relative to your credit limit is not higher than 30%.

By maintaining a low credit utilization ratio, you can manage your debts better and boost your FICO score.

Getting Secured Credit Cards

Secured cards are handy financial products designed for everyday and emergency use. They have the power to help anyone looking to build or rebuild their credit history toward more meaningful financing opportunities in the future.

For instance, your stint with your secured card can qualify you for unsecured cards with more rewards and flexibilities.

In getting one, always shop and compare to get the best rate possible. While secured cards have little to no annual fees, their APRs tend to be higher than regular ones. There’s also the security deposit to consider.

While you are all for credit building, don’t overlook fees and add-ons that might ultimately outweigh the benefits of keeping one. So shop wisely.

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