For a financial economy that relies on the credit system, it’s not particularly easy to build good credit! If you’re saddled with bad credit, you need ways to build up your credit as quickly as possible. Whether you have bad credit or no credit at all, below are some ways to use a credit builder card (otherwise known as a secured credit card) to bolster your credit score and get you working towards your financial goals.
What Is A Secured Credit Card?
Secured credit cards give you a small line of credit when you set down an affordable, refundable security deposit. It functions similarly to a standard credit card, except for that security deposit. If you have bad or low credit, lenders may write you off as a risky borrower. Rather than simply declining your credit card application, they can give themselves a layer of protection by requiring a security deposit in case you default on your credit payments. However, if you manage your line of credit successfully and responsibly, you’ll get the full security deposit refunded to you.
How Much Is The Security Deposit?
This depends on the card itself. Some secured credit cards will have security deposits as low as $50, sometimes even less. Most cards, however, will want you to match your credit line with an equivalent deposit. If you deposit $500, then your credit limit will also be $500. Remember, these cards are intended to help you build credit.
Why Bother With A Secured Credit Card?
So if you only receive a credit limit that matches your security deposit, what’s the point? For many people trying to build credit, it can be hard to get a standard credit card because your credit score is either too low or too limited for them to approve you. You need a credit card to build credit, but no credit card companies or banks want to risk you. It’s a tough situation to be in! The secured credit card lets lenders approve you for a card with less risk to themselves. As your credit scores rise, you’ll be able to get off a secured credit card and onto a standard credit card.
Which Secured Credit Card Should I Get?
Just like with standard credit cards, not all secured credit cards are created equal. In addition to the security deposit, some may ask you for an annual fee, monthly charges, or card insurance. Others will automatically unlock some of the perks of their standard credit card offerings as you improve your credit score. And remember, some of them require smaller security deposits than others. Research and compare, and always read the fine print.
How Do I Use A Secured Credit Card To Build Credit?
Secured credit cards are a tool, nothing more. They will build credit depending on how you use them. Secured credit cards often come with low credit limits (making it hard to use them to finance large purchases) and high-interest rates (making it very costly to you if you decide to carry a balance). That’s fine! They aren’t intended for large purchases with extended balances. To use them as intended, you need to use responsible credit card habits.
The three fundamental habits of building good credit are:
1. Making On-Time Payments
Every month, you’ll receive a credit card balance statement containing all the purchases charged to the credit card. You don’t have to pay the balance off in full every month, but not doing that is what gets people in trouble. Interest is accrued monthly on balance carried forward. To raise your credit score, pay your balance off in full every month.
2. Keeping Your Balances Low
To pay off the full balance monthly, it’s important not to use your credit card to spend money you don’t have. Use it to make small, everyday purchases – a grocery trip, a tank of gas, your morning coffee stop. Rather than using cash or your debit card to pay for these routine purchases, use your secured credit card and then use the cash or debit card to pay off the monthly balance.
3. Paying Off Your Debts
If you’re currently chipping away at debt, use your secured credit card to build your credit in two ways. Rather than making payments on debit from your bank account, use your secured credit card. The on-time payment on the debt will help your credit score, regardless of how you paid it. Now, however, you also have a charge on your secured credit card. Pay that off in full when the monthly balance comes around, and you’ll have just boosted your credit score again. Two positive credit score hits from essentially one transaction? Sounds like a plan.
How Much Will A Secured Credit Card Raise My Credit Score?
Raising credit scores takes time. Thankfully, a secured credit card gives you a way to do something about a poor credit score, but it still takes patience before you’ll see the good credit habits paying off. With due diligence, you should be able to see a boost to your credit score in under six months. Take note, however! Every time you request a hard inquiry into your credit score, sometimes called a hard pull or hard credit check, it can negatively affect your credit score. Soft credit inquiries, on the other hand, allow reviews of your credit without impacting your score. Make sure you know what route you’re using to track your results!