Having a great credit score is rewarding in many ways, from being able to get a good mortgage to receiving affordable rates on a car, and even qualifying for credit cards with more perks. Achieving that score, however, is not always an easy journey.
Unexpected and emergency payments can veer savings and payment plans swiftly off course. This can result in the inability to pay back loans as planned, leading to a decimated credit score. Suddenly, receiving approval for credit cards with decent interest rates is nearly impossible. Or maybe, circumstances aside, you have never even had a credit score at all.
One smart solution is to seek out a secured credit card. These cards help with a damaged credit history, or work toward building a score for the first time.
What is a secured credit card?
A secured credit card can be defined as a middle ground between a debit card and a traditional credit card. As opposed to most credit cards, a secured credit card offers a line of credit defined by a security deposit. In other words, your credit limit is nearly always equal to an amount of money designated by the bank and deposited into the account when you open the card.
For instance, if you are granted a secured credit card with a spending limit of $300 dollars, you must first put that same amount into the account. This way, the bank, credit union, or credit card company issuing the card receives your trust in the form of that initial deposit.
Like a credit card, you can utilize it for purchases or bill payments, and pay it back every month. Over time, you may be able to put more money into the account, thereby raising the credit line. Working toward rewards is also a possibility for many of these secured credit cards.
How to find the secured credit card for you
As getting a secured credit card is often about saving money over time and building up credit, it’s important to put the research in to find the right card for you.
The annual fees for secured credit cards range from $29 to $99, though some cards don’t even come with annual fees. Be sure to find the best rates annually, and on late fees, which can range from $25 to $35. APR and interests rates may be higher for some of these cards, as they are not designed to be used for longer stretches of time, so also endeavor to find the lowest rates, the goal being better financial standing, not being crushed under numerous fees.
Some cards even request an application fee. It’s best to filter those out. Be sure to always read the fine print.
Of course, there are perks to watch for as well. A number of secured credit cards may come with no international transaction fees (the average is 3%), as well as travel insurance and coverage for car rental.
How to build credit with your secured credit card
A compelling reason to get a secured credit card is to build an entirely new credit score from scratch, or salvage a suffering credit score. Building a solid credit score within the 600-700 range is well within reach with a secured credit card, and will qualify you for a traditional credit card.
The basic rule of thumb when repairing bad credit or building new credit is to spend no more than 30% of the credit limit, and pay it right on time. The secured credit card is not a prepaid card you can deposit more cash into after spending the balance. As well, the limit is normally $200 to $300, so it’s hard to incur dangerous levels of spending anyhow.
One tip would be to take a monthly bill that costs 30% or lower than your credit line, and paying it with the secured credit card. This ensures you have a correctly calculated purchase once a month that must be paid on time anyway. As well, figure out smaller purchases you make on a regular basis, such as lattes and streaming service subscriptions, and pay for them using the card. So long as you remain at or under the 30% and are prompt with your payments, your credit score should improve within a few months to a year.
To ensure the secured credit card purchases and payments are being reported to the credit bureau, also occasionally check your credit score. Once a year you can go on annualcreditreport.com and pull your Equifax, Experian, and TransUnion scores to make sure you are on the right track.
Remember, once you have utilized the secured credit card for its intended purchase, you can always transition to traditional credit card use, have the deposit returned, and enjoy a high credit score and newfound confidence in your budgeting, spending, and savings practices.