Checking your credit report and credit score once or twice a year is one way to keep track of your personal status. Credit plays a big role in the world, and it’s one factor that determines approval for mortgages and other loans.
If you have a low credit score, you might feel that it is impossible for you to get a credit card. Although a credit card can help rebuild a poor score, getting a credit card with bad credit isn’t the easiest task. Despite the challenges, options are available to people in this situation.
For many, a secured credit card has been the solution to this dilemma. These credit cards are unique in that they require a security deposit. Understandably, you may not jump at the idea of giving a bank a security deposit. But if you go this route, you can acquire a credit card despite a terrible credit score or no credit score. Banks that issue secured credit cards will give you a chance when other banks close the door.
How exactly does a secured credit card help build your credit?
The answer is simple. Most banks that issue secured credit cards report to the credit bureaus on a monthly basis. Credit bureaus maintain a complete record of your credit activity. Your credit report includes the names of all your creditors, your current balances, as well as your payment record. Together, these factors determine your credit score and your overall credit health.
If your bank reports to the credit bureaus each month, every timely payment plays a role in raising your credit score. For this reason, it’s crucial that you never miss a payment or send a payment late. Lateness can further complicate your credit score, and if this happens, it’s practically impossible to obtain future financing.
A secured credit card also gives you the opportunity to improve you debt management skills. With this type of credit card, your credit limit matches your security deposit. For example, if you send a security deposit of $500, the bank will issue a credit card of the same amount. This doesn’t mean that you’re free to max out your credit card or skip your payments. Security deposits are held in an interest-bearing account, and the bank only touches this money if you default and stop paying your credit card bill. A security deposit is essentially collateral for a credit card.
But even with this collateral, maxing out your secured credit card can have a negative impact on your credit score. Keep your balance under 30% of your credit limit and your credit score will improve.
A secured credit card will not immediately improve your credit rating. Typically, it takes about 6 to 12 months of excellent payment habits to notice a significant increase in your rating. But don’t get discouraged. Manage this credit card account responsibly and your bank may offer you an unsecured credit card after one or two years.
