A good credit history means good rates on loans and other credit facilities. Once damaged though, rebuilding your credit can be difficult. However, you can get started by using a secured credit card that is easier to acquire than most other lines of credit. In this post, we shall look at how to increase your credit score with a secured credit card.
Difference between a Secured and Unsecured Credit Card
Unsecured credit cards are the common type and only require a look at your credit history for approval. When your credit history is not favorable, your lender may issue you with a secured credit card.
Unlike the former, instead of referring to your financial history, secured credit cards require you to deposit collateral. The amount of your security deposit determines what your credit limit will be. And in case you default on your payments, the issuer uses your deposit to recoup their money.
How to Increase Your Score Using a Secured Credit Card
Building your credit score is all about using your available credit smartly. Here is how:
1) Only use what you can settle monthly
A secured credit card allows you to show lenders that you can be financially responsible. The easiest way of doing this is by making small purchases and settling your bills in full by the end of every month. In doing so, your payment history, which accounts for 35% of your FICO Score, improves.
Additionally, whenever possible, pay more than the required minimum to ensure that your balance remains low. The reason being, beyond showing that you can handle your finances properly, your credit utilization ratio (CUR) will reduce.
30% of your credit score is derived from this ratio, which is calculated as your debt divided by your credit limit.
Also, by being timely with your payments and paying over the minimum, you keep off from paying hefty interests on your credit purchases.
2) Make several payments per month
Your lenders continually send your financial reports periodically to the three credit bureaus; TransUnion, Equifax, and Experian.
However, financial institutions and lenders are not obligated to inform you when they send your report. So, you could be making payments at the end of the month while they submit reports mid-month. As such, your credit repayment record may be affected negatively.
Keep this effect at a minimum by making multiple payments in the course of the month. This will ensure that your balance is strategically low. For the same reason, after large purchases, ensure that you send money to your credit account.
3) Go for a low interest Secured credit card
Building credit starts with striving to repay what you owe. This can be hampered by getting a card with high-interest rates. Make meeting your card obligations easy by shopping for a card with low interest.
Typically, credit unions offer better deals on cards than banks. Also, go for cards with something extra to offer. Apart from the basic features, apply for cards with standout features like cashback rewards and larger limits than your security deposit.
4) Choose the right card
None of the above will work if your card issuer does not report card activities to the credit bureaus. What you need to understand is that unlike other savings accounts or debit accounts, not all secured credit card issuers submit reports. So, before you apply for a card, ensure that your account usage will be reported.
Secured credit cards can present you with a new chance to grow your credit. But just like other cards, they are prone to misuse. The trick is in shopping for the best deals and using the card diligently: Do not max out the card, carry a balance, or get more cards than you can manage.