Build Your Credit with a Secured Credit
Card
“The only things
certain in life are death and taxes.” Well, that might have been true in
Benjamin Franklin’s day, but in the 21st century, you might as well add credit
cards to that list. Some places, like hotels and car rental agencies, require a
credit card, even if you plan on paying cash. However, if you’re new to credit
or have to rebuild your credit after a major life event, like a divorce or
job loss, you may not be eligible for traditional credit cards but you may be
able to acquire a
secured credit card instead.
1. What is a Secured
Credit Card?
A secured credit card is
similar to a debit card but instead of being tied to your checking account,
it’s tied instead to a cash deposit you’ve made to “secure” the card. If you
put $500 on the secured credit card, you have a $500 credit limit. So why go
with a secured card? Because unlike debit cards, secured cards report to the
credit bureaus, so on-time payments, extra monthly payments and good behavior
will build your credit score. After a while, if you manage your account
responsibly, your credit line may increase automatically without additional
deposits. Many secured credit card
issuers have been known to change the status of your credit card from secured
to unsecured after a specific amount of time paying on time, keeping your
balance you carry around 30% of your credit limit and never going over your
credit limit. Once they do this, they
typically refund your deposit to you in the form of a check. Make sure you always keep your address and
telephone information
up-to-date.
2. Where Can I Get a
Secured Credit Card?
About half of the
nation’s credit unions offer secured cards, so if you’re a member of a union,
that’s a good place to start. One drawback with credit unions is that many only report to one credit bureau
and if you’re looking to establish or rebuild your credit, you’ll want to make
sure the card is reported to all three credit bureaus. If you’re not a member
or your union doesn’t offer one, check out our recommendations for secured
credit cards at the bottom of this article.
.
3. How Much Will a
Secured Card Cost Me?
As with any credit
card it pays to read the fine print. Annual fees, application fees, and monthly
charges can eat up your entire balance, so make sure you shop around to find
the best deal. Also, some things, like the application fee, can often be
negotiable… so, negotiate.
4. How Much is the
Normal Deposit?
Secured credit cards
normally require an initial deposit in the range of $200-$2,000. This will be
your credit limit, and over time, you may build unsecured credit on top of
that.
5. Do All Secured
Cards Report to All Three Credit Card Bureaus?
Having a credit card
goes far beyond being able to buy shoes online. The most important part is that
you’re building credit, and this can only be done if the issuer is reporting
your on-time payments and other factors to the credit reporting bureaus. Some
will not report, some will only report to one, and others send your information
to all three. If you start receiving mailers from other credit cards after
several payments, this is an indicator that they do report; however, it’s best
to read carefully through the terms and conditions – or simply ask the issuer
up front –and choose a card that does report.
6. How Long Will It
Take Me to Qualify for a Regular Credit Card?
If you manage your new
secured credit card impeccably, the credit card issuer will want to keep you as
a customer. Typically after a year of good credit card management, the issuer
will automatically initiate your move to unsecured credit. If after a year your issuer does not
automatically upgrade your account to a traditional unsecured credit account,
give them a call and ask them to do so.
7. What Happens to the
Deposit?
Whatever money you put
down as a deposit gets put into an account of your choice, usually a savings
account, money market or certificate of deposit. You will earn the same amount
of interest on this deposit as you would if you had put it in a normal bank
account. After you close your secured credit card, the deposit will typically
be held for a couple of billing cycles to cover any stray charges. Ask the
issuer for exact time periods.
8. What Are the Best
Ways to Use a Secured Card to Build Credit?
Just like with an
unsecured credit card, you’ll want to pay on time and keep your revolving
utilization – the proportion of your balance in relation to the credit limit –
as low as possible. Using the card regularly and paying in full will also show
that you are a good credit risk. However, advisors warn to shed your secured
credit card as soon as possible for unsecured credit. Even though secured cards
may seem safer and encourage savings, because of their higher annual fees and
interest rates, an unsecured card will be better in the long run. So, use the
secured credit card as a stepping stone to build credit and learn
responsibility, then move on. If you
have your secured credit card account for two years or more and it has been
changed to a unsecured credit card, do not close the account before you
negotiate a lower interest rate with no annual fee to keep you as a
customer. Closing your credit card accounts that have been in good standing for
two years or more will cause your credit score to drop. Yes, you can be penalized for closing a
credit card account that you have kept paid on time and under the credit limit. As odd as it sounds, it will take you a while
to build your score back up after closing an account.
Our recommendations for secured credit cards
are as follows and we update the list regularly:
Unity
Visa by OneUnited Bank $250 - $10,000. 17.99%
APR. $39 Annual Fee.
USAA Secured Platinum Card $250 -
$5,000. 9.90% APR. $35 Annual Fee.
primor™ Secured Visa Classic Card $200 - $5,000. 13.99% APR. $39 Annual Fee.
primor™ Secured Visa Gold Card $200 - $5,000. 9.99% APR. $49 Annual Fee.
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