iQuanti: Are you having trouble qualifying for a regular credit card? If you've run into some issues with credit in the past and need to build or re-build your credit score, you might want to give a secured credit card a try.
Understanding Secured Credit Cards
Wondering what a secured credit card is? A secured credit card is a special type of credit card that requires an upfront deposit. It will have the same look and usability as a regular credit card. The only difference is that you'll have to hand over a small amount of money (usually a few hundred dollars) before you can start using it.
This initial deposit is intended to serve as collateral to the card issuer. In case you're not able to pay your bill and go into default, the card issuer will take your deposit to apply towards the balance that is owed. This should be avoided as it will have negative consequences on your credit score.
What are the Benefits of a Secured Credit Card?
Secured credit cards are fairly common and can offer a lot of great advantages:
- Approval is easier. Because you're providing collateral, lenders don't have to rely as much on your creditworthiness.
- A chance to improve your credit score. Since a secured credit card is still a line of credit, your payment activity will be reported to the three major credit bureaus. If you use this as an opportunity to practice good habits, then your credit score will benefit.
- No fees. Many of the major financial institutions offering secured credit cards don't charge any fees to the account holders.
- Earning rewards. Just like a regular credit card, secured cards can offer rewards. These are typically points that can typically be redeemed for gift cards or cash back.
- Refundable deposits. As long as you make your payments and don't default, you'll get your deposit back once you no longer need the card.
Of course, there are trade-offs to using a secured credit card. Other than the requirement of making the initial deposit, users will generally have to work with a lower credit limit and agree to higher-than-normal interest rates. Also, there's no guarantee that you'll be able to upgrade to a non-secured card later on.
Highly Effective Credit Card Habits
No matter what type of credit card you're using, good habits are fundamental to your success. Here are a few tips to stay on the right path:
- Always pay on time and in full. Solid payment history is the cornerstone of credit usage and accounts for 35 percent of your FICO score. A simple way to do this is to set up the Auto-Pay feature so that you'll never miss a payment.
- The lower you can keep your balance, the easier it will be to manage. In fact, keeping your spending to less than 30 percent of your available credit line will help improve your credit score. Start by using your card for one or two regular, reoccurring expenses like a cell phone bill or gas for your car.
- Avoid credit card interest. It can be hard to get out of debt while you're actively earning interest. The only way to avoid this is to never carry a revolving balance. Again, keep your spending minimal and do everything in your power to pay your balance in full every month.
- Keep your card open for as long as possible. The longer you have a card with a good history, the better it will be for your credit score. 15 percent of your FICO score has to do with the age of your accounts. If there are no fees, then what's the harm? Note that if you upgrade your secured credit card to an unsecured credit card, it will likely maintain the same credit history and account age.
The more you can make these habits a regular part of your routine, the better the financial opportunities you'll have to look forward to.
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Original Source: Why Secured Credit Cards are Better Than You Might Think
