People with a poor credit score face a number of difficulties, ranging from being rejected for a mortgage to being asked to pay an unusually high interest rate. In addition, they are also required to pay more for insurance and even asked to deposit a security amount to avail public utilities such as gas, water, and electricity.
In contrast, a high credit score makes it easier for you to get approval on high-value loans and that too at low-interest rates. Given the criticality, it would be safe to say that credit repair is not a choice for those with a low score, and that’s when using secured credit cards might very well be just what the doctor prescribed.
Secured Credit Cards Help Improve Credit Rating
When you apply for a secured credit card, you are required to deposit cash collateral, which becomes the credit limit of your account. The deposit is kept in a savings account that is connected to the secured card. Some security card issuers require the cardholder to deposit a specific percentage of the credit line, which often is at least half of it. Others might issue a credit line that is equivalent to the amount of money deposited in the account. Most of the secured cards require individuals to deposit an amount varying from $200 to $1,000.
When using a secured credit card, you must remember that it is not just for shopping – consider it to be a key instrument for improving your credit score. Make timely payments for the secured card and maintain a healthy buffer to establish a positive reputation and improve your credit score. In addition, disciplined credit management for 9 to 12 months might convince the issuer to convert the secured credit card into an unsecured credit card that has a higher stake in calculating the credit score.
Choose the Right Credit Card to Improve Credit Rating
When it comes to choosing a card, here are the key factors to consider:
Although most secured credit cards entail an annual fee; if you are lucky enough, you might also find secured cards with no annual fee. Most of the secured cards have an annual fee between $29 to $45. Therefore, if you find a card with an annual fee higher than $45, look for some other option. If a secured card has no annual fee, ask for its monthly charges and set up fee. Some card issuers charge as much as $75-100 as the setup fee. Just to let you know, the least secured card issuers charge their cardholders every time the credit limit is increased or decreased.
Issuer Must Report to the Credit Bureaus
Don’t forget that the only reason you asked for a secured card was to build your credit. Ensure that you choose a card issuer that frequently sends the reports to the credit bureaus. Therefore, before you agree to take a secured card from an issuer, find out whether the issuer will send your report to the credit bureaus, and whether the card will be converted to an unsecured card if you make the payments on time. An unsecured card always helps individuals get a better credit score than the secured one.
Check the Rates
Although many secured cards have higher interest rates, some cards may have comparatively lower rates. In addition to the interest rates, check out the Annual Percentage Rate (APR) and the additional fees you are required to pay. The Public Savings Bank Visa Secured card, for instance, has a fairly reasonable APR of 11.24%, but a high set up fee of $75; besides, additional fees are charged every time there is a change in credit limit.
Improving Your Credit Rating the Right Way
Similar to any other financial product, a secured credit card is not for everyone and must be used wisely. It is important to evaluate your needs, credit score, and the already available sources of credit improvement (credit cards or credit union membership) before applying for a secured credit card. If you don’t qualify for other credit lines and need to rebuild credit, a secured card is the right option for you. To learn more about how to improve credit rating, feel free to speak with one of our consultants.