When you have poor credit or no credit, it can be difficult to prove to lenders that you can be entrusted with debt. A secured credit card is a great way to check creditworthiness.
That’s how it’s done secured credit card works: you put down a security deposit usually between $ 200 and $ 500 and that money becomes your line of credit. Since your deposit will protect the issuer when you fail to make payments, even if you have bad balance or are you can qualify no credit score. Once you’ve made about a year’s worth of on-time payments, you’ll usually qualify for a traditional credit card.
How does a secured credit card work? A 7-step plan
Ready to give your credit a boost? Follow these seven steps and you are ready to go Building a good credit in no time.
1. Save for your security deposit
The first step is to save the $ 200-500 cash deposit that you won’t have to touch for a year. The reason it should be money that you don’t have to spend is because you have to pay off your bill in full every month to build up a good bankroll. You need to keep this money open as a line of credit. If that can’t be done, save $ 10 or $ 20 a week until you have enough to make a deposit.
2. Compare credit cards
The big things to look for are:
- Low annual fee: Secured credit cards often come with high fees. Look for an annual fee of $ 35 or less.
- Low APR: The annual percentage rate stands for the annual percentage and is basically the interest rate and fees you pay to borrow money when you have a balance. The lower the better. Since most credit cards offer a grace period for new purchases before interest starts, this shouldn’t be a factor in paying off your balance in full each month.
- Report to all three major credit bureaus. You only create a credit history if your card issuer has your Payment history to the credit bureaus. Look for a card that is reported to all three offices each month: Equifax, Experian, and Transunion.
- Option to convert to an unsecured card. Ideally, you want to convert your secured card to an unsecured card rather than qualifying for a new unsecured card. One reason is that Age of the loan determines 15% of your credit score. If you receive a new unsecured credit card and close your secured card to get your deposit back, your credit score will temporarily drop.
Make sure you apply for a secured credit card instead of a prepaid debit card. A prepaid debit card does not report your payments to the credit bureaus, so you do not create a credit history.
3. Apply for secured cards
Once you’ve researched the cards, you can apply. To get a credit card, you will need to provide some personal information, including your social security number and your employment status and income. Most, but not all, also require a bank account.
Applying for a credit card usually results in a hard request to your credit report. Having a credit score will likely cause your score to drop by a few points. Don’t worry: it’s completely normal and temporary.
Based on the criteria above, here are some great secured credit card options. All information will be up-to-date as of March 1, 2021. The terms and conditions can change frequently. So read the fine print before applying.
Discover it Secured Card
- No annual fee.
- Refundable minimum deposit of $ 200.
- Reports to all three credit bureaus.
- After eight months, Discover will automatically check your account every month to see if you are eligible for a refund of your deposit and will switch to an unsecured line of credit.
OpenSky Secured Visa
- $ 35 annual fee.
- Minimum deposit of $ 200.
- Reports to all three credit bureaus.
- OpenSky does not require a credit check or a bank account, which makes it attractive to those with particularly bad results who have been declined for other secured credit cards. You must still state your annual income and your monthly housing benefit payment.
Secured Mastercard from Capital One
- No annual fee
- Depending on your balance, you may be able to qualify for a $ 200 line of credit for a deposit of just $ 49.
- Reports to all three credit bureaus.
- Capital One will be considering you for a secured line of credit in just six months.
You are less likely to be denied a secured card than a traditional credit card because you leave a security deposit. But there are still a number of reasons you might be denied, such as one that was recently Bankruptcy petition, a tax lien with insufficient income to repay debt or an extremely low credit score.
If you’re declined, the credit card company must tell you in writing why. You are entitled to a copy of the credit report used to make your decision. Deny any information with the credit bureau if you do not believe it is correct. Otherwise, you may want to apply for a card that doesn’t require a credit check, such as a credit card. B. OpenSky. If you have access to a local community bank or credit union, see if they have credit building options.
What you don’t want to do is apply for a couple of cards in a short amount of time as each application will affect your score slightly. Negative credit information usually does the most damage to your score within the first two years. Therefore, it may be necessary to simply wait and reapply once the time is up.
4. Automate your payment
If you’re having trouble remembering to make payments, consider setting up automatic payments for at least the monthly minimum that you want to be withdrawn from your bank account. You can usually do this online or by calling your loan issuer.
However, if you frequently overdraw or frequently have just a few dollars left in your bank account as payday approaches, this is not a good option. Better to set up text notifications to remind yourself when payment is due.
5. Charge a small expense per month
Start building your history by billing you for a small necessary purchase each month. Small is the key here. You never want yours Credit utilizationor the percentage of outstanding credit you use to reach more than 30%.
If possible, keep it below 10%. The credit utilization determines 30% of your creditworthiness. Since you don’t know when your issuer reports your activity to the offices each month, follow these guidelines even though you are sure you can pay off the balance in full each month.
6. Ignore reward points
Some companies offer Reward points credit also for secured cards. But as you build credit, ignore them. Each point is only worth about 1 cent. If you allow credit rewards to affect your spending, you will quickly wipe out any benefits you deserve.
7. Apply for an unsecured card
After you’ve received on-time payments for at least six months, you should see an improvement in your credit score. Within a year, you will likely qualify for an unsecured credit card. Celebrate your newfound creditworthiness by asking your card issuer if you can convert your line of credit to an unsecured one.
Remember that the same rules for responsible use of your funds still apply. You want to continue to repay your balance in full every month in order to avoid interest expenses. Swiping your card at least once a month while keeping your credit usage as low as possible can improve your credit score even further.
Rebuilding your credit is not easy. However, the payoff is huge. You’ll pay less security and be prepared for a major purchase like a car or house. Don’t expect great results overnight. However, with a little care, you will be well on your way to building good credit.
Robin Hartill is a certified financial planner and senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advisory column. Send your tricky money questions to [email protected].
This article originally appeared on www.thepennyhoarder.com