How to Build Credit with Secured Credit Cards
If you are planning to take out a mortgage, maybe it will be a good idea to start thinking of your credit score. The situation with credit is somehow weird: it is hard to get one if you donít already have a credit record
, and if you already have a credit score, then you simply donít need to borrow any more. Young people and those who have never borrowed before need to build a good credit history over time so that they can qualify for larger loans in the future.
Applying for a secured credit card
may be a good start for your credit history. Basically, the credit limit
on most secured credit cards in Canada and the United States is equal to the amount you have on deposit with the financial institution which provides the secured credit card
. By the same token, if you want to increase the limit of your secured credit card, you simply have to put more money in your deposit account. Under normal circumstances, a secured credit card requires a minimum deposit of about five hundred dollars, but it can soar up to fifteen thousand dollars if you reach such an agreement with your credit card issuer
. When applying for a secured credit card you should bear in mind that the interest rate on these cards is usually higher than the one on unsecured credit cards. Still, if you are planning to build a credit history
by using a secured credit card, you can at least try to avoid application and processing fees
(although almost every secured-card issuer charges an annual fee).
Secured credit card holders often complain that their entire deposit has been consumed with fees before ever using the card. The good news is that if you have a good payment
history with a secured credit card, chances are that your credit card issuer will agree to give you an unsecured credit card
. On the average, card holders will qualify for an unsecured credit card after making timely payments for one year. Persons who aim to obtain a regular unsecured credit card quicker than that may call several providers and ask about their requirements.
Remember that it is unwise to apply for more than one card at a time. Multiple inquiries on your credit report
make it look worse to your potential creditors. There are different credit cards, and it is better to pick one with a comparatively low and non-fluctuating annual interest. Then, you may consider starting with a low available balance. It is wise to put only as much money as you can afford to pay. Add new funds after you pay your rent and other utility bills. Your initial balance may be as low as $50. If the credit card issuer requires a higher deposit, you may keep looking at other offers for some more. When you obtain your card, use no more than half of the available funds. After all, the idea is to use the card, not drain it. Remember that credit agencies
will examine the cardís usage, together with the available credit. Pulling out the whole amount just after you put it in will not improve your credit score
Finance experts explain that you should not close down the deposit account with your secured credit card as soon as you get an unsecured one. Also, as a holder of a secured credit card, you should try not to charge up to the limit on your card, as it makes you look too dependent on your card. On the other hand, paying off the full amount of your balance each month does not help you establish a good credit score. Buying something and then taking a month or two to pay it back is a reasonable strategy for building a credit history with your secured card.
To sum up, a secured credit card may be a valuable stepping stone for people who want to start building their credit score, if it is used wisely and responsibly.