Thank you for your question about secured credit card and improving your credit.
Before I explain some techniques to deal with your credit problem, my first recommendation is to avoid the lender who gave you such poor financial advice. On the one hand, you need to take out a credit card or a loan to establish your credit history and this will cost you money in annual fees and/or financial costs; however, you don’t have to overpay to build up credit.
Establishing credit with a secured credit card is a common tactic when a person wants to build a credit score. In general, you cannot obtain a loan or credit if you do not have a credit history. A lender judges their lending policy on your financial ability to repay a loan, and your willingness to repay. That means that the creditor analyzes your past payment history, as reported on your credit report, and reflected by your credit score.
Before you take a secured credit card learn about:
- Reasons to take a secured credit card
- Terms to look for when shopping
- Other steps to take to improve bad credit
Reasons to Apply For a Secured Credit Card
A secured card is one tool that can help you improve your credit score. The lender lets you take out a credit line, based on a deposit that you leave with him as collateral. In order to build your credit score you will need to follow these important rules:
- Always make you payments on time.
- Use your card but make sure that it is being reported to the major CRAs (Credit Reporting Agencies) such as Experian, Equifax, and TransUnion.
- Don't max out your available credit. If your line of credit is $100, then you can charge up to $100 per month. However, pay off at least 70%. Remember the more you don't pay off, the less you have to use for the next month.
- Avoid making only minimum payments. Minimum payments: Making minimum payments stretches out your payment schedule. Basically, the company is telling you that you should take out a $100 loan that you pay back close to $21 in interest per year. While those are relatively small values, it still is an expensive loan. Check out Bills.com minimum payment calculator to see just how much a small purchase will cost you.
Secured Credit Card: Shop Around for Good Conditions
When shopping for a secured credit card shop, look at these features:
- Amount of Deposit: Your deposit will determine the amount of credit you can receive. A $100 deposit is a very small amount. For example, Wells Fargo Secured Credit Card requires a deposit between $300-10,000, into a collateral account. Your credit line will be equivalent to your deposit.
- Interest rates: Secured card rates vary from bank to bank. Interest rates are variable, tied to the prime rate. Interest rates vary, depending on the type of activity, including purchases, balance transfers and cash advances.
- Annual Fees: Annual fees vary. If you are taking a small line of credit, then a small charge translates into a big expense. For example if you have a $25 fee on a $100 line of credit, that is a 25% fee.
- General conditions of credit cards:
- Minimum payment
- Payment date and the last date before you are charged penalty fees, including late payment and returned payment fees.
Here are some examples of rates and fees for two secured cards, as advertised on Wells Fargo and Bank of America, and Capital One’s Web sites on August 2012. Read all the fine print for all the terms and conditions.
|Well Fargo||Bank of America||Capital One|
|Credit Line (based on equivalent deposit*)||$300-$10,000||$300-$4,900||$200-300|
|Interest Rates - Purchases (Variable tied to Prime Rate)||18.99%||20.24%||22.9%|
|* The deposit might be less than your credit line, depending on your credit worthiness.|
Secured Credit Card: Only One Way to Improve Bad Credit
If you are trying to establish credit, then a secured credit card is a good place to start. Other methods include getting a co-signer, taking a small installment loan, or a retail card.
It takes time to build up your credit score. I recommend that in the beginning you be careful with your secured credit card and follow these tips:
- Create a personal budget and track your expenses.
- Treat your secured credit card as cash.
- Make your payments on time. This is the single most important factor in building credit.
- Pay off your secured credit card balance each month. This way you will show activity and keep your credit utilization at the maximum. Try to build up your available credit line.
- Monitor your credit report. Repair your credit and dispute any inaccurate entries.
- Deal with any delinquent and collection accounts. If you don’t know how to deal with them, read Bills.com article about debt relief options.