Did you think that a secured credit card can help you learn how to raise and maintain a good credit score? That depends on your particular financial situation. It may or may not help and you need to understand these cards thoroughly before you apply for one. This is still a credit card that you have to regulate and use properly – otherwise, it could ruin your credit history.
Before we can fully discuss if it can indeed help you with credit repair, let us find out what it is first.
What are secured cards?
There are many types of credit cards and all of them suit a specific financial situation. Secured credit cards is a type of card account that requires you to make a deposit before you can use it. That sounds a whole lot like debit cards right? Rest assured that they are not the same.
Every purchase that uses your debit card eats up the deposit that you put in the account. With a secured card, it still functions like the traditional credit card but your credit limit is tied to your deposit. The average deposit is typically between $200 and $500. If you have a credit limit on your secured credit card that amounts to $500, you need to deposit the same amount of money. Now when you use this card to purchase, let us say, a pair of jeans for $50, you need to pay that amount when the billing comes in. The $500 is only there as a guarantee that in case you cannot pay for your dues, the creditor can get a hold of your security deposit as payment.
When you get a secured card, you have to come up with more than the security deposit. There are other fees involved too. CardHub.com published a 2013 secured credit card report that revealed the following:
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Issuers charge secured card holders with an annual fee of $0 to $106.
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Cards that do not carry a balance has an average annual fee of $27. Those that carry a balance are charged with $85 worth of annual fees.
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The average deposit that consumers can place on the card is $313. The range is between $200 to $500.
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Secured credit card activities are reported to the three major credit bureaus.
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67% of secured credit card issuers allow online applications, 40% allow phone applications and 73% allow bank applications.
Source: http://www.cardhub.com/edu/secured-credit-cards-report/
One of the typical owners of this type of card are students. This is something that can help parents introduce credit cards to college students. Not only will it help the student learn how to utilize credit cards, it will also help them build a good credit history. At least, under the right circumstances.
3 reasons why credit cards with security deposits cannot help your credit report
According to Bankrate.com, not all banks offer secured credit cards. In fact, they revealed that some banks are shying away from secured cards and opting to offer unsecured cards with a lower credit limit and a higher interest rate. But, for those who still offer this, they usually approve it for people who are new to credit – not those who have a bad credit history because of a bad credit behavior.
Using a secured credit card has become an option for those with a bad credit history simply because they have lowered their chance of getting another type of credit. As you know, lack of good credit history can keep you from taking on credit to rebuild it. But here’s the thing, if you insist on using this for the purpose of improving your credit report, it will not boost your score – at least, not immediately. Here are the three reasons why a secured credit card may not help with credit repair.
Reason 1: The credit inquiry can affect your score.
If you apply for a credit card, even one with a security deposit to guarantee payment, the credit card company will still pull out a copy of your report. That credit inquiry will leave a mark on your credit report. If you applied for more than one card and they all pulled out a copy of your report, that can affect your score.
Reason 2: You could have put the deposit to good use.
If your credit report is ruined by debt, you could have used the security deposit to help lower your debt amount. This is something that will help affect your total debt amount positively – which is 30% of your credit score. There is no need to let all the inquiries bring your score down.
Reason 3: A new credit card account will bring down your account history.
Every new account will lower the average account history that you have. That can also bring down your score. The older the history, the more appealing your score will be. A new account will make the average look more recent and that can affect your score negatively.
Ideally, these secured credit cards are given to consumers who are new to the credit industry. Usually, to be able to apply for credit, a person has to have a credit history. The dilemma of newbies is that they need to be given credit in order for them to get adequate data on their credit report. In most cases, they will not be approved of the traditional credit applications. That leaves them with a bad credit report that can affect their chances of employment. But with a secured credit card, the presence of the security deposit will lessen the risk that the issuer will take on you. In case you run off without paying the debt, they have the security deposit to take as payment.
While that is helpful, you need to understand that this is not the end all and be all to improve your score.
Credit cards in general can make or break your credit rating
Bottom line is, if you really want to improve your credit score, the secured credit card is not what you need. You have to look at the habits that will make you a financial failure and make sure you avoid them.
In the end, you have to make sure that you use your existing credit card wisely. If you still have debts on them, you should pay them off properly and you should implement the following:
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Pay your dues on time. It is not enough that you pay your debts, you have to make sure that you will do so before the due date. Late payments will reflect badly on your report and can affect 35% of your score – which is all about the payment history.
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Pay the full balance at the end of the month. If you finances can manage it, try to pay your dues not just on time, but in full. That will really help keep your debt amount low – which is good for 30% of your score. In fact, CreditKarma.com explains that it is not necessary for you to have a balance or to pay for the interest each month. It will be counted as a credit activity if you use your card and pay it in full on the next due date.
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Keep your balance less than 30% of your credit limit. You can also try to keep your balance low – no more than 30% of your credit limit. If your limit is $10,000, you should only have $3,000 at the most in your balance. If you are going beyond that, do not use your card first. Pay off the balance so you do not go beyond 30%.
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Do not open a lot of accounts at the same time. If you have to apply for a credit account, a loan or a new credit card, make sure you do not apply all at the same time. That can bring down your score because of the credit inquiries.
- Open only the accounts that you need and will use. Some people got so many credit cards because they accepted everything that was offered to them. This is discouraged because a lot of credit cards will leave you with too much room to incur debt. Only apply for what you need and leave it at that.