A secured credit card is a great tool to either help you establish credit initially or assist in restoring your credit to boost your credit score.
Unlike a traditional credit card, a secured credit card requires a deposit as collateral. For example, you deposit $500 into a savings account that you cannot touch. In return, you receive a credit card with a $500 credit limit.
The secured card operates exactly like a regular credit card. However, should you be unable to make the payments, the lender will use your deposit to cover the expenses (this prevents the lender from taking a loss and your credit score from declining). With responsible use, the card can help build your credit history and score. At some point, when your credit is fully established and in good standing, you’ll want to transition to a regular, unsecured credit card.
Here are some tips to ensure that transition goes as smoothly as possible.
Never Be Late or Miss a Payment
Lenders analyze your payment history before deciding to provide you with an unsecured credit card. If you have missed payments on your account, this will count against you. Lenders want to see that you are responsible enough to handle an unsecured credit card. Late payments give the impression that you are struggling, which translates to a bigger risk for them and will directly impact your approval. If you can afford it, your best bet is to always make payments higher than the minimum. Doing so will definitely make you stand out positively in the eyes of the lender.
Keep Your Balance Down
Be sure to keep your balance low. All credit cards have a credit limit. This limit is the maximum amount you can spend on your card. Lenders want to see that you can manage debt responsibly – so try never to spend more than 30% of your available credit limit.
On a $500 credit card, that would mean not having a balance consistently over $150. A good rule of thumb is not to purchase anything you cannot pay off in full at the end of the month. However, we all know emergencies can come up. If that is the case, be sure not to go over your credit limit. This signals that you’re having a hard time handling the responsibility of a credit card.
Check Your Credit Score & Report Regularly
Monitoring your credit history is very important. Doing so will enable you to act early on any discrepancies, such as fraud. The goal is to raise your credit score with good payment history, and fraud can quickly cause your score to plummet. Your credit score will be one of the main deciding factors when determining if you are approved for an unsecured credit card.
Each year, you’re able to pull your credit report from the three major credit bureaus (Experian, Equifax, and TransUnion) at no cost. Simply visit www.AnnualCreditReport.com to request your credit report.
Don’t Forget About Other Bills
When deciding whether you are ready for an unsecured credit card, lenders will not only look at your secured credit card history but will also consider your complete credit history. This can include any other debts or financial obligations in your name, such as medical bills, rent, utilities, or student loans. So, it’s just as essential to make sure you are handling these bills responsibly.
We’re Here to Help!
Transitioning from a secured credit card to an unsecured credit card is a big step and takes planning and dedication. If you’re ready to make this switch but need some guidance, we are happy to help.
Please give us a call at 202-479-2270 or email us at members@agfed.org to let us help you get on the road to financial independence.