Millions of Americans are finding that their poor FICO score is preventing them from getting approved for new lines of credit. It’s a catch-22 that many adults find themselves trapped in.
You need a good credit history to be approved for an auto loan, mortgage or even a charge card. If your credit history is poor, your chances of approval are significantly lower. Since you can’t get new credit, you won’t be able to repair your credit score.
There is still hope if you are trying to rebuild your credit score, you can apply for a secured credit card.
Rebuild Your Credit with Secured Credit Cards
A common question asked by consumers looking to rebuild credit is if secured credit cards can help, and the answer is often “yes”. Though this doesn’t necessarily mean that it is the right approach for everyone. There are benefits and disadvantages to repairing your credit with a secured charge card that you should be aware of.
How Secured Credit Cards Can Rebuild Your Credit
Secured credit cards can be used anywhere traditional charge accounts are accepted. You still have a line of revolving credit that is paid back to the lender every month. The main difference is your credit limit is determined by the amount of your secured deposit.
If you deposited $500 in the account linked to the card, your credit limit would be the same. Secured credit cards typically offer limits that range from $500 up to $5000, depending on the type and issuer.
Every time you use a secured credit card and make a monthly payment, the information is generally sent to the three recognized credit reporting agencies. Over time, this can help boost your credit score so you can eventually get approval for an unsecured loan.
A secured credit card can also help you keep your credit usage to debt ratio in the optimal range, and this will positively affect your FICO score.
Drawbacks of Using a Secured Credit Card
While a secured credit card can help some consumers rebuild their credit, it might not be the best choice financially for everyone. There are some drawbacks to using secured credit cards.
- A cash deposit is required and the amount will determine the credit limit on the card.
- Some secured credit cards do not report monthly payments to all 3 bureaus. This can lengthen the amount of time it takes to repair your credit score.
- Interest will be applied to any monthly balances not paid in full, and this will affect the card’s credit limit.
- If you accidently go over your secured line of credit, the penalties can be expensive. This will also have a negative impact on your credit score.
- Some secured credit cards begin charging interest immediately after the purchase is made, instead of waiting the traditional grace period.
- There are not any customer rewards programs linked to secured credit cards.
How Long Will It Take Before Credit Scores Improve?
You won’t see your FICO score instantly improve, but over time a secured credit card can give it a boost. It will help you build a strong credit history, and this in turn will improve your score.
There are a few steps you can also take to ensure that you are getting all the bonuses that should come with using a secured credit card. This includes,
- Make monthly credit card payments on time. This is one of the most important steps you can take, since it also comprises a substantial portion of your credit score. You also don’t want to be stuck with the high interest rates that are typically applied when the monthly credit card payment is overdue.
- Do not purchase items on the secured credit card that you won’t be able to easily pay off. This can indicate to potential lenders that you are a high-risk applicant when you apply for an unsecured loan or new line of credit.
- Even if you can make the monthly payments, you don’t want to “max out” the credit card. This will negatively affect your credit usage rate, which makes up 30 percent of your FICO score. Your goal is to show that you can use credit responsibly, and this includes staying below the card’s limit.
If you show that you can use credit and repay it on time, you should start seeing a steady improvement in your score after a few months. Most lenders will also approve you for an upgrade to an unsecured credit card, typically after a year. This can cause your credit score to jump a few more points.
The Final Word
If you are trying to rebuild your credit, it can be difficult. You need credit to get credit, and when you have a subpar FICO score your options are often limited.
A secured credit card might be what you need to boost your score, but it is also important to make sure that it is the right one for you. The card issuer should report to all 3 credit agencies, and allow for a grace period after a charge has been made. You also want to compare interest rates, to ensure you are getting the best credit card for your money.