How to Use Secured Credit Cards to Rebuild Your Credit?

Introduction

Re-establishing credit may seem daunting, though, a secured credit card is one of the easiest and efficient ways to do so. Secured credit cards are particularly created for those people with a poor or no credit history at all. It provides a way through which you can enhance your credit score through practicing good financial behaviors with minimized risks for both the parties. In this article, we will learn how a secured credit card operates, how one can use it to improve credit score and some tips on the use of a secured credit card.

What is a Secured Credit Card?

A secured credit card functions similarly to a traditional credit card, but with one key difference: It is only available for those willing to provide a cash deposit as collateral. This deposit is often your line of credit that may vary between $200 and $2,000, depending on the card and the amount of cash you want to provide. The deposit minimizes the risk for the lending company and that is why secured credit cards are available to those with poor or no credit history.

Your secured card works like a normal credit card since the card issuer keeps your deposit and lets you use the card to purchase items up to your credit limit, make a balance and pay it gradually. When you handle the card properly, the Issuer will report your payment activity to the credit bureaus, thus improving your credit score.

How Secured Credit Cards Help Rebuild Credit

Establishing Payment History

Payment history is the most important factor in determining your credit score, accounting for 35% of the total score. By consistently making on-time payments with your secured credit card, you build a track record of reliability. Even one missed or late payment can have a negative effect, so prioritize making full payments before or by the due date each month.

Lowering Credit Utilization

Another key element of your credit score is your credit utilization ratio, which represents the amount of credit you’re using relative to your total available credit. Keeping your credit utilization under 30% is essential for building a good credit score. For example, if your secured card’s credit limit is $500, aim to keep your balance below $150. By spending within your limits and paying off the balance in full each month, you can improve your credit utilization, which will positively influence your score.

Creating a Credit History

For those with no credit history, secured credit cards offer a valuable opportunity to start building one. Lenders look at the length of your credit history to evaluate your borrowing habits over time. Secured credit cards allow you to create a solid foundation, establishing a history of responsible credit use. The longer you use the card responsibly, the better your credit score will reflect that behavior.

Transitioning to Unsecured Credit

Over time, consistent use of a secured credit card can help you transition to an unsecured credit card. Most issuers will allow you to upgrade to an unsecured card after a certain period of responsible use, such as 12 to 18 months. This transition not only improves your credit score by showing that you can manage credit responsibly but also increases your credit limit, which further reduces your credit utilization ratio.

Best Practices for Using Secured Credit Cards

Pay in Full and On Time

The single most important habit you can develop when using a secured credit card is to pay your balance in full and on time every month. Even though secured credit cards require a deposit, they are still credit cards, and any unpaid balances can accrue interest and damage your credit score. Setting up automatic payments or reminders can help ensure that you never miss a payment.

Keep Balances Low

Keeping your credit card balance low is essential to maintaining a good credit utilization ratio. Although it may be tempting to spend up to your credit limit, it’s important to keep your balance below 30% of your total credit limit. This practice will positively impact your credit score and help you avoid falling into debt. If possible, aim to pay off your balance entirely each month.

Monitor Your Credit Regularly

As you rebuild your credit, it’s important to monitor your credit score regularly to track your progress. Many credit card issuers offer free access to your credit score as part of their services, or you can use free online tools to monitor your credit. Reviewing your credit report frequently also ensures that there are no errors or fraudulent activities that could negatively impact your score.

Do not apply for several credit cards

Even though this is a good strategy to increase the total amount of credit available to you, the move is bad for your credit score. Any time you apply for a new credit line, an inquiry is made on your report and this has a negative effect on your score until some time. However, it is wiser to use at least one secured credit card and do it properly to establish a credit history.

Use the card for small, easily affordable items.

The best way to use the secured credit card is to make small expenses that can be paid off in full each month. For instance, use your secured card to buy food, fuel or any other necessity and then promptly repay the amount. This will assist you to create a good credit score while not using substantial balances that may end up being harmful.

Bottom Line

The best way proven to be efficient when it comes to credit repair is the usage of a secured credit card since it will help you build a new credit history, reduce your credit utilization ratio and create a stable credit history. If you do the right thing that is paying your balance in full and on time, keeping the utilization ratio low and checking your credit report you will see good scores over time. In the long run, the usage of the secured credit card will build the credit worthiness, and this will see one upgrade to an unsecured credit card or even a mortgage. If used appropriately, secured credit cards are effective in the process of reconstruction of your credit status with the assistance of the Steuben Trust Company.