Establish Credit History with Money you have
The usage of a secured credit card for raising your credit score is another new millennium concept. Stephen Snyder, Credit Karma, and Credit.com all discuss the use of a secured credit card to improve your credit score.
A secured credit card is different from the typical credit card (the credit card we recommend is Charity Charge) because you put money into an account, and only that money can be used to make purchases. A regular credit card provides you with a credit limit, and you can spend until you reach that credit limit.
The credit bureaus also treat secured and unsecured credit cards the same way with regard to your credit score. The bureaus and FICO look at when the card was opened the limit you have on it, the balance, and the payment history. If you allow the card to sit unused, empty, and still open, this can actually have a negative effect on your credit.
The negative effect comes from the fees usually associated with having the secured credit card. Most companies offering secured cards have an annual fee, which has to be paid. The payment will come off of your credit deposit each year, just like the annual fee on a regular credit card is tacked onto the credit balance you have.
If you use secured credit cards correctly, you can start building a better credit history with an appropriate debt ratio. The debt ratio is based on how much income you report versus how much debt you have. You’ll discover later there is a strategy that can be used to build a better credit history. For now, understand that it is better to have a secured credit card with $500 as the balance, where you use only $100 each month versus using the entire $500 and putting another $500 on the card for the next month.
How Secured Credit Cards Work
- Search around for the best secured credit card. Depending on your current credit history, you may be able to gain one without an annual fee.
- Examine the security deposit you need to put down for the card. Unlike prepaid credit cards, which exist, the secured credit card does not, always, require the same deposit amount as the credit limit. For example, if you have a credit limit from Capital One for $200, you may be asked for a security deposit of $49. It is based on your creditworthiness.
- The security deposit is held in an account and not typically used when you use the card to clear the balance. Instead, you have a monthly payment to make. If you use the $200 limit, then you owe $200 for that month.
- Many secured credit cards will raise your credit line after a period of time where you do not require further deposits. In other words, if in the first 5 months of having the card, you make use of the card, make a payment for the amount spent, and do not use any of your deposit, your credit limit may increase.
The key to these cards is that you are making a monthly payment just as you are with a regular credit card. The only difference is that you need to provide a certain security deposit based on your credit history. The advantage is that these cards report to the credit bureaus.
Secured credit cards often get mistaken for prepaid credit cards.Prepaid credit cards are items you can pick up in a retail store, load money on them, and use them like a Visa or MasterCard. Many “gift cards” that are sent out by retailers are prepaid cards so that you can use them as a credit card, with a certain amount prepaid money. Since prepaid cards do not have an account associated with them, they are not reported to the credit bureau.
Secured credit cards do have an account. You open it like a credit card, use it as a credit card, but you have secured it with a deposit like you secure a mortgage with your home’s value.
How The Strategy Works
- Open a secured credit card account.
- Make the security deposit.
- Use the card for fuel or other small purchases, at least once a month.
- Go home and make a payment to the card for the purchase made.
- The credit card will report your account “in good standing.”
- You need to keep the purchases on the lower 50 percent of the credit card limit.
- It needs to be paid off each month, ensuring you do not touch your deposit.
- As long as you are reported “in good standing,” your credit score will increase over time.
Secured credit cards like all other strategies in this book are not miracle solutions. It takes time for the creditor to report your account history and for this history to be calculated as part of your overall score.The more “good standing” credit you have, the higher your credit score will be.