Having a competitive credit score is crucial for a consumer’s success in the world of debt. Traditional lenders weigh credit scores heavily when they leaf through applications for credit cards, auto loans and mortgages. A consumer who does not have a good credit score will have difficulty receiving fair interest rates and terms. A secured credit card is an excellent product for helping a consumer who has poor or non-existent credit to grow his or her credit score. A consumer’s credit score can change drastically within six to 12 months just because someone issued that person one secured credit card.
What Is a Secured Credit Card?
A secured credit card is a special card for people with bad credit. Consumers who do not have any credit history may obtain a secured credit card, as well. The secured credit card gets its name from the security deposit that consumers have to submit to qualify for the card. Secured card applicants have to deposit funds that the card company can hold for a specific period. The fund serves as security for the lender in case the debtor ends up defaulting on the card.
Does the Credit Card Company Keep the Deposit?
The credit card company will not keep a debtor’s security deposit forever. The lender will state its intended period in the terms when a person applies for the card. Many providers return security deposits after one year of faithful payments. The consumer has to keep the credit card account in good standing for the provider to return the deposit. Some credit card companies may hold the deposits for a long period, and others may have shorter periods. Nevertheless, the deposit stays in a bank account until the time comes when the cardholder meets the return requirements or terminates his or her account.
Does the Security Deposit Earn Interest?
Many credit card companies place security deposits into accounts that accrue interest for the consumer. However, not every company does that. Therefore, a consumer who wants to earn interest will have to examine the terms carefully to see if interest earning is an option. The person may want to select an alternative credit card company if he or she finds that one company does not earn interest on the security deposits.
How Much Is the Credit Line on a Secured Card?
In most cases, the consumer’s credit line is equal to the amount of money that he or she submits to the credit card provider. A consumer can usually request credit line increases with the submission of an additional deposit. However, a few providers offer their customers additional unsecured credit lines. For example, a person may submit a $49 security deposit and receive a $200 credit line. The credit line depends on the provider’s rules and the consumer’s history. New applicants should always research several providers before choosing one.
How Is the Secured Card Different From a Regular Credit Card?
The only difference between a secured card and a regular credit card is the invisible security deposit that the consumer places. Secured credit cards have Visa and MasterCard emblems on them just as regular credit cards do. The consumer can use a secured Visa or MasterCard at any location that accepts regular Visa and MasterCard products. Additionally, the credit card companies report the payments the same way they report them for regular cardholders. Most secured accounts show up as regular credit card accounts. However, a prospective cardholder should always verify that information with the credit card company first.
How to Get a Secured Credit Card
The first step in getting a secured credit card is finding one that suits the consumer’s needs. The person will want to compare at least three secured cards to ensure that at least one of them has some of the features for which the consumer is searching. For example, one consumer may want a secured credit card with a low APR. Another consumer may be more concerned with the annual fee than he or she is about the APR. A different person may be interested in transitioning from a secured card to an unsecured card. Not all card companies offer unsecured versions of their secured cards.
Applications for secured credit cards are usually very short. The person will need to supply basic personal information such as social security number, telephone number, address, employment information and the like. Some providers will run a credit check while other providers will base their decisions on the person’s ability to pay. Once the applicant obtains an approval, the system will prompt that person to send a security deposit. The credit card company will place the security deposit in the bank and then issue a card with a credit line that equals the security deposit.
How to Use a Secured Credit Card to Improve Credit Score
A consumer may notice a credit score increase as soon as the new credit card account opens. The number of accounts does factor into a person’s overall credit score. Therefore, a person with bad credit may see an initial spike after obtaining a secured credit card. However, the person will have to practice responsible credit usage to keep the spike and to raise the credit score further. Timely payments are one of the most important parts of a person’s credit score. A consumer will want to avoid making late payments at all costs. Late payments can make a credit score plummet. Therefore, the secured card payments have to be on the top of the debtor’s priority list.
Utilization is another factor that affects credit score. Having a credit card and not doing anything with it can affect a credit score negatively. A cardholder should always use his or her credit card even if it is for small purchases such as fuel purchases. Furthermore, the individual will want to pay close attention to the overall balance and the amount of money that he or she is borrowing. Using the entire balance of a credit card is a harmful move. A smart debtor will keep his or her utilization down below 50 percent. A 30 percent utilization number is ideal, but anything under 50 percent will show the creditors that the person is not desperate.
Building one’s credit score takes time. Credit score boosting is not something that happens overnight. However, a consumer can cause a consistent rise in credit score by following some of the above-stated strategies. The person should see significant credit score results after six months to one year of timely payments. Eventually, unsecured providers will send offers for the person to apply for their cards.