A credit card allows you to borrow money from your card issuer. A secured credit card is a type of credit card that allows you to borrow money from your issuer upon depositing some money to act as security. In most cases, you can get a secured credit card if you have bad credit or have no credit scores whatsoever. But how much will a secured credit card raise my score? You will find out about this shortly.
Secured credit card specifically acts as a credit builder and helps you increase your credit scores significantly as long as you use it appropriately. When you pay your debts well, your credit card issuer reports your card usage to the credit bureaus, who then calculate your credit scores based on the various pieces of information. We shall see the various kinds of information that credit bureaus use to calculate credit scores so that you can know where to be more careful.
When you show good credit usage, the credit card issuer usually promotes you to an unsecured credit card. The card does not require you to deposit any amount of money in your account. The amount you had used for the security deposit then becomes available for use in your checking account. An unsecured credit card credit limit depends on your overall credit scores. For secured credit cards, your limit depends on the amount you deposit. The higher the amount, the higher the deposit.
What are the factors to consider before getting a secured credit card?
There are various factors to consider when applying for a secured credit card. They include the following.
i) Minimum deposit amount
Some secured credit cards require you to deposit a certain amount of money in your account to get the card. You should check the card with the amount you can afford to pay for the deposit.
ii) Fees
Be very keen to check whether the card has various fees such as monthly fees, annual fees, cash advance fees, ATM withdrawal fees, and so on. If you get a credit card with lower fees, the better.
iii) Annual percentage Rate (APR)
Annual percentage Rate refers to the interest rate that you have to pay on top of the amount you borrow. Secured credit cards have lower APRs. However, the interest rate is not the same across all the card issuers, and you should be keen to see the issuer with a low APR.
How to get a secured credit card
If you plan to build credit with a secured credit card, it is easy to carry out the process. You can have a secured credit card from various financial institutions. One can apply for a secured credit card online or a physical branch of the issuing financial company. Secured credit card issuers do not need to check your credit scores since there is no risk involved on their side.
To begin your application, you have to visit the card issuer’s website online and submit all the necessary information. You must have a checking account or a payment card that you will use to fund your deposit transaction.
After completing the application, the card issuer requires you to pay the deposit to get the card. You can activate a virtual debit card as you wait for the tangible card, which can take more than a week to arrive.
You require various things such as your physical address, your phone number, email, identification document, and Social Security number to complete your application successfully.
How to use a secured credit card
The usage of the secured credit card is not different from the unsecured credit card. The following are ways you can use it.
1) Buy goods and services
You can pay for your goods or services at various places, whether online or at physical stores. All you need are your card’s details, such as your card number, card’s expiry dates, and the CVV to pay online. You can even make payments using your card’s online account by transferring money using the routing and account numbers.
2) Send money to others
You can transfer money to others online using your credit card. If transferring money to a credit card of the same issuer, you require the recipient’s account number. However, you require the routing and account numbers of the recipient to transfer money to a card of a different issuer.
3) Pay bills
You can use your credit card to pay for your monthly bills such as water, electricity, and internet, among others. If you set automatic payments for recurring bills, then the better as you will not need to initiate the payments now and then. But can you pay a credit card bill with another credit card? Well, it is possible to pay your credit card bill using another card. That means you can use your secured credit card to settle the debt of another card.
4) Withdraw money
A secured credit card can help you get cash advance in your bank account and use it in various transactions that you couldn’t do with the card. Also, you can use a secured credit card to withdraw money at an ATM using your PIN. However, withdrawing money using your credit card is costly. The fees accompanying the withdrawals are so high that financial advisors discourage getting cash advances from your credit card.
How much will a secured credit card raise my score?
A secured credit card can help you to improve your credit scores within six (6) months of your credit card usage. However, that is possible if you focus on the five essential factors in building your credit scores. They include;
- Payment history
- Credit utilization ratio
- Length of credit history
- Credit mix
- New credit
Therefore, the number of credit scores you get from your credit card issuer depends on the above factors. There is no specific number of scores to attain using secured credit cards at a particular time.
How do I improve my credit scores using a secured credit card?
To effectively build your credit scores, you should follow various guidelines to ensure that your credit card issuer has everything positive to report to the credit bureaus. You should use your credit card in the following way to ensure that you get the best.
- Make timely payments of your credit card debt. When you make timely payments, your card issuer reports that to the credit bureaus who utilize the report to develop your credit scores.
- Practice low credit utilization ratio. Credit card issuers usually give you a credit limit whereby you cannot use more than that. If you want good credit scores, make sure that you utilize at most 30% of your credit card limit. That way, you will be able to maintain a low credit utilization ratio.
- Keep the card active. If you keep the card active, your credit card issuer will see your card usage’s responsibility. However, if you keep your credit card dormant, you will for sure get low credit scores.
How do credit bureaus calculate credit scores?
I have mentioned that credit card issuers report your card usage to credit bureaus. We have three main credit bureaus in the US. They include Equifax, TransUnion, and Experian. Every financial institution reports to these credit bureaus, and each credit bureau calculates credit scores independently. Apart from credit scores, credit bureaus also come up with a credit report.
Credit bureaus calculate credit scores based on the following factors.
- Payment history. How you have been paying your credit card debt plays a significant role in your overall credit scores. The payment history takes up to 35% of your overall credit scores.
- Amount owed. If you have so many debts, then you are going to have low credit scores. If you want to have good credit scores, you should make sure that you do not accumulate a lot of debts. You can apply for many credit cards as possible but make sure you pay them on time. The amount owed contributes up to 30% of your credit scores.
- New credit. New credit inquiries affect your credit scores negatively. If you apply for so many credits within a short period, your scores will be affected badly. New credit carries 10% of your overall credit scores.
- Length of credit. The length of credit takes up to 15% of your credit scores. If you started using credit cards long ago, then there is a possibility that you have accumulated credit scores for a long time. However, if you began using your credit scores recently, your credit scores will likely be little. The length of credit history does not guarantee good credit scores.
- Credit mix. Credit mix contributes 10% of your overal credit scores. If you mix credit cards with other loans such as auto loans, personal loans, mortgage loans, and so on, then your credit scores are likely going to be good.
Can I get a credit card with bad credit?
One can get a credit card even if they have bad credit. But which credit card can I get with bad credit? You can get a secured credit card or unsecured credit card for bad credit. As I mentioned earlier, secured credit cards do not require credit scores and are the best to utilize even when you do not have any credit scores.
Bottom line
A credit card is a payment card that allows you to borrow money from the issuer. A secured credit card helps you to deposit money in your account before getting it. The more money you deposit, the higher the limit. A secured credit card is suitable for someone with no credit history or someone with bad credit.
