Secured Credit Cards To Improve Credit Score – Both secured and unsecured credit cards allow you to make purchases when you want and pay off when the statement is due so you don’t have to pay interest. The main difference is in the initial process – secured credit cards require you to make a security deposit to start using the card while unsecured credit cards do not. Both types of cards have advantages and disadvantages, and choosing the right one depends on your personal financial situation and credit history. This post walks you through the difference between secured and unsecured credit cards as well as how secured credit cards work to help you make the right choice for your personal finances.
Secured credit cards, like secured loans, require you to post collateral when you open an account. With a secured credit card, you make a refundable security deposit with the issuing bank or financial institution. Your deposit will always be equal to the credit limit of the account – for example, a $500 deposit will give you a $500 credit limit. After a certain period of time, some card issuers may offer you the option to increase your credit limit by adding to your original deposit or by paying over a certain period of time.
Secured Credit Cards To Improve Credit Score
Because a deposit reduces the financial institution’s risk, you can easily qualify for a secured credit card even if you have bad credit or a limited credit history. For this reason, secured cards are a great option for people looking to build credit.
Everything You Need To Know About Secured Credit Cards
Note that secured credit cards are different from prepaid cards. Although both require a deposit before you can use them, prepaid cards do not trigger a credit check and do not affect your credit score in any way. This means you can’t use a prepaid card to build credit. In turn, your secured card issuer will report your payments – whether they’re on time, late or not – which can affect your credit.
An unsecured credit card does not require a deposit when you open an account. The card issuer sets a maximum credit limit that you can borrow without asking you to put up any collateral on your end. Instead, the bank performs a credit check that uses information about your credit score, credit history, income and other financial factors to approve or reject your application, as well as to determine loan limits and other requirements. 1]
Not all lenders have the same requirements. So, you may want to check with your credit card company for specific approval requirements before you apply for a new card. However, you typically need to meet three common criteria to qualify for a secured credit card:
If you’re worried that your credit score or credit history will be a barrier to getting a secured card, then consider cards that don’t do a strict background check.
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If you pay for a secured credit card with a deposit, you usually get your money back when you close the account or switch to an unsecured credit card. However, if you can’t pay off the account, the card issuer can keep your deposit and use it to satisfy your debt. Remember: the deposit serves as a guarantee, so don’t rely on paying your monthly bills if you fall behind. Otherwise, you may risk losing your deposit and having your credit card account closed.
You can apply for many unsecured credit cards online. However, unsecured credit cards have strict approval requirements. Again, each lender sets its own terms and conditions, but many unsecured options require excellent credit scores or good credit scores. While you may qualify for some unsecured cards with credit or even no credit, these products may have less attractive terms and APRs.
While secured and unsecured credit cards differ in important ways, both can help you build credit if used responsibly. If you have bad credit, a secured credit card can also help you rebuild your credit.
If you want to use a secured card to build credit, making monthly payments on time is essential. Late payments on any credit card can hurt your credit score because it affects your payment history. In the case of secured cards, your security deposit can also be forfeited.
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Credit utilization calculates how much of your credit limit you are using at any given time. For good credit health, you should look to make it below 30 percent. Because of the low limit nature of secured credit cards, you should pay attention not to exceed the percentage. For example, if your credit limit is $300, spending more than $90 will cause you to exceed the recommended credit utilization ratio.
Every time you carry a balance on your credit card – whether it’s secured or unsecured – you’re likely to pay interest. It will also increase the rate of credit utilization. For this reason, paying off your balance in full each month makes good financial sense. Whether you’re looking to build credit or get out of debt, budgets play an important role in financial health. Determine how much you can afford to pay by the due date, then limit your spending to that monthly amount.
No matter what type of credit you have, staying on top of your credit score is always a good idea. Some credit cards offer free credit monitoring services. You can also check your credit score for free every year by going to annualcreditreport.com.
The best credit card depends on your specific financial situation, so you may want to consider the following factors when making your decision.
How To Use A Secured Credit Card To Build Credit
No one type of credit card is best for everyone, so choose based on your financial situation, credit history and overall creditworthiness. While unsecured credit cards tend to be the choice of eligible people, secured credit cards can help people who need to rebuild or build credit. You can also consider a credit builder loan that can help improve your credit as well as provide a path to secure credit cards in the future.
Ana Gonzalez-Ribeiro, MBA, AFC® is a Certified Financial Advisor and Bilingual Personal Finance Writer and Educator dedicated to helping people in need of financial knowledge and advice. His informative articles have been published in various newspapers and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. He also founded the personal finance and motivational website www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches personal finance courses in Spanish or English for the W!SE (Working In Support of Education) program that teaches non-profit workshops in NYC.
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A Secured Credit Card Is A Good Way To Improve Your Credit Score Or Build Credit If You’re Starting From Scratch
A secured credit card requires an upfront cash deposit as collateral, usually in a savings account or certificate of deposit (CD). In most cases, the credit limit of the account is the same as the initial deposit, because secured cards require applicants to pay a cash deposit. If you need a higher credit limit on your secured card, you’ll need to put down more money.
Credit card issuers will refund your security deposit when you close the account, unless you pay. Because lenders can keep your deposit if you qualify, they see secured credit cards as less risky, so people with bad credit or no credit can get it easier.
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