Secured Credit Cards: Credit Solutions for Poor/No Credit Consumers
In America, an individual’s credit score has a huge influence on their ability to participate economically. A credit score can impact efforts to secure a car loan, to rent an apartment, or even to get a job.
Unfortunately, many Americans struggle with a poor credit history. For instance, estimates indicate that more than half of all borrowers have subprime credit scores.
Luckily, there are credit solutions that can help those with bad credit repair their scores. A secured credit card is a great way for high-risk borrowers to get access to the credit they need.
Let’s take a closer look at what a secured credit card is, and why it is one of the best credit solutions for borrowers.
What is Your Credit Score, and Why is it Important?
Before we look at what a secured credit card is, let’s take a step back and look at a quick overview of credit scores. Understanding your credit history will make it easier to choose between a secured credit card and other credit solutions.
How Does FICO Calculate Your Credit Score?
Every borrower in the United States has a credit report. This report contains details regarding their loan history: how much money they have borrowed, whether they have made payments on time, etc. This report is based on data maintained by the three main credit-reporting bureaus: Experian, Equifax, and Transunion.
Your FICO credit score is calculated based on what your credit report reveals about your trustworthiness as a borrower. FICO assigns your credit score a number ranging from 300-900, with 300 being poor and 900 being excellent. The credit solutions you need will depend on where your score falls within this range.
What Factors Impact Your Credit Score?
There are five primary factors that impact your credit score:
- Payment History
- Amounts Owed
- Length of Credit History
- Credit Mix
- New Credit
Your payment history refers to their record of making minimum payments on time. This factor also takes into account whether you are delinquent on any payments.
The amounts owed refers to the total amount of debt you are carrying. In general, your credit score will be better if you carry a balance on your credit card that is less than 30% of your total credit limit.
Your length of credit history is how long your accounts have been open. Borrowers who have had open accounts with good payment records for several years will have a better credit score than those with newer accounts.
Borrowers with a mix of accounts also typically have a higher credit score. Having a mix of credit cards, car loans, and mortgages is better than having just credit cards.
Finally, frequently opening new credit can work against your credit score. Lenders see it as risky if a borrower has several accounts with a short lifespan.
Some aspects of your credit score can only be resolved with time. For others, there are credit solutions to improve a borrower’s standing.
What Does Your Credit Score Impact?
Credit scores have a huge impact on an individual’s ability to participate in the United States’s economy. Many borrowers are surprised to learn how many areas of their lives can be affected. Often, borrowers begin looking for credit solutions when they encounter one of these issues.
The most common situation that credit scores come up in is when borrowers request a new loan. This includes requesting a credit card, financing a car, or requesting a mortgage.
Any institution that requires a monthly payment may look at your credit score to determine your trustworthiness. For instance, apartments, utility companies, and cable providers often use a credit score to determine whether to charge a deposit.
But there are also unconventional places that will check your credit score. For instance, an employer might look up your credit score to determine if you are dependable. In some cases, insurance companies are also checking credit scores to calculate a driver’s potential riskiness.
What to Do About Your Credit Score
If you are not happy with your current credit score, there are options for moving forward. These credit solutions can help repair bad credit or build a credit history for those who do not have one.
What are Credit Solutions to Repair Credit?
With all of the institutions that use credit scores, it can be extremely restrictive to be labeled with a poor credit score. Credit solutions like paying off old debts and making payments on time can help borrowers repair their scores over time. In the interim, however, it can be difficult for these individuals to get access to credit to cover necessary expenses.
The Paradox of No Credit
In some cases, circumstances can be even more difficult for individuals with no credit history.
This creates a sort of paradox for individuals without credit. In order to build credit, a borrower needs to secure a loan from a lender. But in order to secure a loan, they must have a good enough credit history to meet the lender’s standards.
In order to repair or build a credit history, then, it is important for borrowers to access credit solutions designed for their specific needs.
Understanding How a Secured Credit Card Can Help Your Credit Score
A secured credit card is one of the most accessible credit solutions for borrowers with poor credit or no credit. These credit cards provide a way for borrowers perceived as “high-risk” to access credit.
What is a Secured Credit Card?
When you are using a secured credit card, it works just like a regular credit card. You use it at a store or online to make purchases, and make payments toward the balance every month. Like other credit solutions for folks with poor credit, however, it does come with some additional requirements
The main difference with a secured credit card comes up in the request process. In order to open a secured credit card, you must put down a deposit against your monthly credit limit.
For instance, a secured credit card with a $1000 limit may require borrowers to put down a $500 deposit up front. The deposit is usually 50% to 100% of a credit card’s total credit limit, depending on the borrower and the credit card company.
The credit card company retains this deposit as collateral, in case a borrower fails to make a payment. This collateral helps to offset the risk of accepting a borrower with a poor or nonexistent credit history.
Other Restrictions with Secured Credit Cards
In some cases, secured credit cards have other costs and fees that regular credit cards do not. These might include request fees, processing fees, and annual fees.
Be careful to avoid secured credit cards that have excessively high fees. Paying these fees might impact your ability to keep up with your monthly payments. These fees also detract from the amount you can put toward your deposit, leading to a lower credit limit.
Why Choose a Secured Credit Card Over Other Credit Solutions
You may be thinking that a secured credit card works similarly to a bank card or a debit card. In a way, they are similar.
With a secured credit card, your deposit goes into an account held by the credit card company. Your own money works to establish your credit limit.
With a debit or bank card, you also use your own money to make purchases with a card. But there are some important differences.
Unlike a debit card, a secured credit card is still a true credit card. This means that the credit card company shares your payment history with the credit reporting bureaus. For this reason, a secured credit card actually builds your credit history.
Building your credit history will help you to qualify for lower interest rates on credit cards and other types of loans. Some loans, like home loans or automobile loans, are difficult to qualify for at all without a credit score of at least 650. An unsecured card can help you to achieve this credit score and meet your new financial goals.
Additionally, purchases you may on your secured credit card are not deducted from your deposit. Instead, the company only uses your deposit if you fail to make a payment. You will also receive the full deposit back if you have no late payments and transition to an unsecured credit card.
How to Best Use a Secured Credit Card to Rebuild Your Credit
A secured credit card can help you repair or build your credit. But it is important to use it strategically to have the best results.
The best way to start building credit quickly with an unsecured credit card is to only use it to make small purchases and to pay off the balance every month. If you will not be able to pay off a purchase by the end of the month, do not put it on your credit card.
In some cases, it might be better to pay off all or part of your balance before a statement closes. This way, the credit bureaus will view you as using a lower percentage of your credit limit.
Transitioning to an Unsecured Credit Card
A secured credit card is only a temporary option for borrowers looking to repair their credit. Eventually, your goal should be to transition to an unsecured card.
The issuer of your secured credit card will review your account periodically to evaluate your activity. In some cases, the issuer of your secured card will give you the option to transition your existing card to an unsecured option. In this case, you will be able to get your deposit back.
If you are not able to convert the card you have, you will be able to request with other credit card companies after 12 months of on-time payments. If you request an unsecured card and get rejected, wait before making more requests.
Every time you request credit, it triggers an inquiry into your credit report. Inquiries can hurt your credit score because they indicate to borrowers that you are looking for more funds. Making several requests in a short period of time can make a borrower look desperate for credit.
Instead, if you get rejected by a credit card company, wait for a letter explaining why your request was not accepted. These letters usually contain specific information on problems in your credit report. This information will help you to determine where you can improve your credit history.
Questions to Consider Before Opening a Secured Credit Card
So far, we have covered features that pertain to most secured credit cards. But depending on the company you request with, some secured credit cards might have different features than others. Here are some questions to consider before you request for a particular credit card to make sure it is the right one for you.
Does My Bank Offer a Secured Credit Card?
Many of the major credit card companies offered secured options. But sometimes going through a bank you already work with can be the best way to get started.
If you are already a member or a bank or a credit union, talk to them about their options. In many cases, credit cards offered by these institutions have more competitive interest rates and lower fees.
Does the Issuer Report to All Three Credit Bureaus?
The whole purpose of opening an account with a secured credit card instead of an unsecured card is to build credit. To have the best results building credit, you should make sure that the card you choose will report to all three credit reporting bureaus.
Learn More About Potential Credit Solutions Today
It is easy to see how a secured credit card can be a great option for borrowers with poor or non-existent credit history. That said, it is not the right choice for everyone. Luckily, there are plenty of options available.
To learn more about potential credit solutions for your situation, contact us. We will work with you to find the option that is right for you to build your credit and get the funds you need.
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