Showing that you can use credit responsibly can play a significant role in improving your credit score. This applies doubly when you’ve run into financial problems in the past, such as racking up credit card debt or payday loans and later consolidating them. You want to show that you’re capable of doing better, but your options may be limited.
Making timely payments on a credit card, utility bill, or loan will show up on your credit report and be reflected in your score. Payment history actually makes up 35% of your score, more than anything else does. So, just paying on time can immensely change things.
This is why secured credit cards are such an excellent option. They are a limited option when compared to a traditional credit card, but they are far easier to qualify for when you have bad credit. In fact, there are tons of secured credit cards to choose from so not having one might be the worse option.
What Does Secured Mean
A secured credit card is what you might think of as a combination credit card and debit card. With a traditional credit card, you are approved for a certain amount based on your credit history. A secured card is different. Instead, you deposit a certain amount of money, and that becomes your credit limit. So, if you sign up and deposit $250, you’ll have access to $250 to use on the card.
The deposits are what make these cards available to many people, even those who may not qualify for a typical credit card. Because the lender has your deposit as collateral, the lender is taking on less risk. If you then don’t pay a payment, the payment can be taken out of your deposit, so they will still get paid.
However, most secured credit cards do not have the same benefits and rewards that a regular credit card has. Their reason for being available is to help you clean up your credit.
If you are thinking about using a secured credit card to improve your credit score, there are a few things to keep in mind.
Make Your Payments on Time
A secured credit card can assist in improving your credit scores by allowing you a chance to show that you can responsibly manage credit. When you make all payments on time, this helps you start building a positive payment history. After a certain amount of time proving yourself, lenders may be open to the option of converting your secured card into a traditional credit card.
Of course, the rate at which you see change will vary. If you are using this as your first ever credit account, it will quickly establish history. If you have had credit difficulties in the past, it will take more time. Things like collection accounts, bankruptcy, and delinquencies will make the rate of improvement take longer. However, it is still worth the option as, over time, it will make changes.
Keep a Reasonable Credit Utilization
Just because you have a card with a certain credit limit, that doesn’t mean that you should spend every cent of it. In fact, it’s better to spend less. The percentage of your credit limit that you are using has an impact on your credit scores, as well.
On average, financial experts say that you should use no more than 30 to 35% of your available credit. However, if you are recovering from a painful financial past, it might be best suggested to go even lower and keep it at 10 to 15%. This ensures you don’t overspend and end up with a higher than average utilization.
People who have high credit scores and strong financial discipline can spend more on their credit cards and then pay the entire balance before any interest comes due. They never spend more on the card than is available in their bank account. Instead, they use the card to get points and keep their credit rating high.
However, this is something that may not possible for you right now. In the meantime, just make educated decisions and keep utilization low for that credit bump you want to see. That’s the most important thing to do at this stage of the process.
Ensure Payments are Reported
Your credit score is built around the information found in your credit report. When you take out a new loan, are sent to collections, or miss a payment, that gets reported. The bills that you pay on time or credit cards you pay off completely also get reported.
If your secured card does not report to the credit bureaus, it doesn’t matter how well you do with payments and credit utilization. None of it will be on your credit report, so none of it will lead to positive changes with your credit score. This is why it’s so important to be sure that your secured account is reported to at least one, but preferably all three, credit reporting companies.
And just in case you considered it, this doesn’t really work the other way around. Late payments may not be reported at first, but when a delinquent account goes too far and hits collection, you can count on it reaching your credit score. This will end up hurting your credit score even more than it was to begin with.
Bearing that in mind, secured credit cards are an excellent tool for fixing a credit score that is less than perfect, and are better options than payday loans or other choices available. Just remember that these credit cards are only tools. The user will still need to make sound decisions to improve their credit. It takes time and effort, but it’s an option that is great to begin with when in a position to do so.