21
Apr

Credit Repair

Lots of consumers are good candidates for a secured credit card, including folks with bad credit, consumers who have no credit score or “thin” credit, and even those who might be at high risk of falling into unaffordable debt and want a safety net in place before taking the plunge on a card. Here’s what you need to know about secured cards and your credit.

What is a secured card?

A secured card is a credit card that looks like any other credit card, including a Visa®, MasterCard® or other major card network logo. The difference between a secured card and a regular or traditional card is that for a secured card you must first pay a cash deposit. The issuer holds your deposit as collateral in case you default on your debt. The money you owe when you use the card won’t be deducted from your deposit. That’s how a prepaid card works. When you use a secured card, you’ll still need to pay the bill every month. If you make the minimum payment only and you don’t pay off all your charges, interest will be added to your balance until it is paid in full.

Your deposit will be returned to you when you pay off the balance in full and close the account

After you use the secured card responsibly for a period of time, generally at least 6 to 12 months, you may be able to transition to an unsecured card, allowing you to get your deposit funds back while continuing to use credit. Some secured card issuers will make this transition for you automatically.

How much is the credit limit on a secured card?

The credit limit on a secured credit card is usually equal to the amount you deposit. The minimum and maximum are set by the card issuer. The minimum is typically $200-$300, and the maximum can be as high as $10,000. Some card issuers allow you to increase the amount of your deposit to get a higher credit limit; others do not.

How does a secured card affect your credit?

First, you should know how a credit card affects your credit. The most influential factor (35%) in your credit score is your payment history. Paying on time, every time, will help you build healthy credit.

The second most influential factor in your credit score is your utilization ratio (30%). That’s the amount of revolving debt you carry in relation to your credit limit. If you have a $250 balance on one card that has a $500 limit, your utilization is 50%. Utilization is calculated overall and for each card individually. Lower is better. People with top credit scores (over 800) tend to have utilization ratios well under 10%. Any time you have a card that carries a balance equal to 80%, 90% or more of its credit limit, your score is likely to suffer, even if the dollar figures are relatively low. So keep your balance low.

The balance on many cards is reported on or right after the statement closing date, which is weeks before the payment due date. Even if you pay off your card on the due date, you might have high utilization if the balance was reported before your payment was received. Don’t be afraid to pay your bill multiple times throughout the month so that the balance reported to the credit bureaus is as low as possible.

The third way a credit card affects your credit is that applying for it creates a hard inquiry on your credit report. Inquiries make up about 10% of your credit score. Each hard inquiry has the potential to lower your score by a few points, but you’ll recover soon. Hard inquiries stay on your credit file for two years but stop affecting your score after one year.

The fourth way a credit card affects your credit is in the credit mix category, which accounts for 10% of your score. For a top credit score, you need to show that you can responsibly handle a variety of different kinds of credit accounts, such as a credit card, a mortgage, a student loan and a car loan. Adding a credit card when you don’t already have one could improve your standing in this category.

The last way a credit card affects your credit is that it contributes to your file age, which accounts for 15% of your credit score. File age is calculated for each account and overall. People with top credit scores have accounts for 20 or 30 years or longer. Once you open a credit account that you’re happy with, leave it open so that it can age.

After you get a secured credit card, it might (or might not) show up on your credit history as “secured.” The way it is reported depends on the card issuer. This designation doesn’t really matter where your credit score is concerned. FICO® and VantageScore® don’t treat secured and unsecured cards differently in scoring. A potential lender, however, may need to see that you have experience with unsecured credit before approving your application. That decision is in the hands of each lender.

Is a secured card as good as a regular credit card?

A secured card works the same way and is just as good as a traditional credit card. If you’ve got your sights set on a mortgage or on better terms for credit in general, set a goal to use your secured card modestly and responsibly for a year and then transition to a regular card to ensure that none of the open credit accounts on your credit report say “secured.”

No matter what kind of card you want to carry, research fees and terms before you make a choice. Some secured cards come with exorbitant annual fees, monthly fees and service fees, but many are absolutely free. Don’t think you have to pay an annual fee or monthly maintenance fee just because your credit is bad. You don’t!

In addition to fees, look at the interest rate just in case you do need to carry a balance. Never charge more than you can afford to repay right away, or the cost of your purchases goes way up and you’ll hurt yourself financially. Since more than half of Americans with credit cards do carry balances, don’t be too hard on yourself if it happens to you. Just educate yourself with regard to how much it’ll cost you to do so.

Here are a few banks that offer free secured credit cards. Visit their websites to find out if you qualify:

If your credit has been negatively impacted, learn how you can start repairing your credit here. You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.