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Category: Credit Cards

What is a Secured Credit Card?

You might be wondering what a secured credit card is, and how they’re different from the norm. Maybe you’re getting ready to buy a house or car, but you’ve been denied, based on poor or no credit history. Even just getting utilities or cell phone service can be depressing if you don’t have good credit. Having poor credit can be emotionally painful and can lower your self-confidence.

Whether you’re starting out from scratch, or you’re making a comeback from bankruptcy, getting a secured credit card can be extremely useful in building your credit.

In this article, we’ll examine secured credit cards and how they work. By the time you finish reading this post, you’ll know all about secured credit cards and whether they’re right for you.

Why Get a Secured Credit Card?

Maybe you’re shopping for your first apartment, or you’re a new immigrant to the U.S., and you need to prove credit worthiness, but you have no credit history. Or perhaps you’ve had a divorce or bankruptcy, and you need to rebuild your credit. Either way, a secured credit line will help.

When you open a secured credit card, the bank will ask you for a deposit as collateral. Are you worried about whether you’ll be approved? Fortunately, many banks won’t check your credit when you apply because there’s much less risk when you’re borrowing your own money.

The biggest reason to get a secured credit card is to improve your credit score. After you show that you can borrow money responsibly, you’ll eventually be trusted with an unsecured line of credit. You might even score a better interest rate too.

One great thing about secured lines of credit is that they force you to limit spending. You’ll only spend what you have, which is good training for anyone who is new at borrowing money.

How to Choose a Secured Credit Card

Your credit line is whatever amount you give the bank for collateral. It could be as little as $300 or as much as several thousand. It all depends on the amount of the deposit you make, minus bank fees.

The key to finding a secured credit card is finding a bank that will report to all three credit bureaus: Equifax, Transunion, and Experian. This is crucial because a lender you want to borrow money from in the future may only use one bureau to check your credit. So, it is essential that each credit bureau has your new secured credit information.

Other things to check are fees and interest rates. Most cards will have an annual fee, but you may be able to find one that doesn’t, or one that has a lower cost than the others.

Your local credit union might have a reasonable deal, or you can try asking a big bank. Another option is to go online.

How to Use Your Secured Credit Card

Secured credit cards aren’t to be used forever. You’d use it only until you raise your credit score, and that could happen in as little as 45 days. You’ll want to get rid of your secured credit card as soon as you are eligible to get an unsecured card because they tend to have high-interest rates and annual fees. Plus, you’re being charged to use your own money, so it will not get you far in the long run.

The best way to raise your credit score quickly is to spend less than one-third of the credit limit and pay it when the monthly bill arrives. Leaving 70% of your credit untouched will help boost your Fico score because you’re using less of your available credit.

However, it’s a good idea not to pay the card off completely. For example, if you have a $300 secured credit line, consider leaving a balance of $2-10 to show that you’re actively using the card. Then do the same next month. You’ll see an improvement in your credit score after a month or two if you continue using this method.

Final Thoughts

Getting a secured credit card is an excellent way to build credit and pave your financial future. You’ll be more able to get an apartment, car, or house, and possibly at a better interest rate.

If you’re trying to raise your credit score quickly, remember never to pay late, not to use more than 30% of the limit, and to always leave a small balance on the card.

Are you considering using a secured credit card to establish your credit or raise your score? What has been your experience with using secured credit cards?

Here’s Why You Shouldn’t Apply for Too Many Credit Cards

Credit cards are a wonderful tool. When used properly you can delay paying for a purchase for over a month, leaving money in your bank account earning interest. However when cards are used incorrectly they can lead to overspending, damage your credit rating and lead to a massive interest bills that cancels out any gains you may have made by delaying a payment, or through rewards programs.

Credit cards and credit ratings

Each time you apply for a credit card the banks will check your credit rating. Your credit rating helps the banks determine how much of a risk you are, and how likely you are to get in over your head and be unable to make payments on your card. While this sounds like an innocent check on your records, it also leaves a mark. Some lenders may do a ‘soft pull’ to check your credit score but these are few and far between. Most do a ‘hard pull’ which means not only do they check your credit score, but your credit report is updated with a note saying that you have applied for finance and their response. A hard pull against your credit that is approved will have a minor negative effect, but if you are denied credit, either through a credit card or a loan, it puts a big black mark against your name.

Before applying for a card consider running a check yourself to look at the health of your credit report. There are multiple companies online that will offer a free once off check.

How banks view open credit cards

If you are applying for a credit card, mortgage or personal loan banks will assess your existing debts and any open credit cards. When considering your borrowing capacity banks will calculate those credit cards as if you have spent the full limit, even if you only ever use a small amount and pay it in full each month.

While it might seem like a good idea to open multiple credit cards to receive sign up bonuses, keep in mind how this may affect your borrowing capacity. If you have plans to take out a business or personal loan in the next few months, now is not the time to be applying for a new credit card.

What to do with all this available credit

The final big risk with too many cards is temptation. My bank account currently tells me I have over $10,000 available, but the vast majority of this is available spending on my credit card, and isn’t truly my money. Having those funds available can be extremely tempting. If you let your spending get even a little out of control you could find yourself paying hundreds in interest costs. With multiple cards the problem is expanded because not only do you have a large amount of ‘money’ available, but you have to track your spend across multiple locations and keep track of varying repayment dates.

Why You Should Apply for a Balance Transfer Credit Card

When discussing the uses for, benefits of, and reasons behind applying for a balance transfer credit card, a little bit of context is required. So money is tight, and you have a ton of credit card debt. Boom. There’s half the scenario right there, but there’s one crucial aspect this scenario yet to be said. You have all of this debt, and you can’t handle it all that well. But on top of that, you have a credit card (or multiple cards) with a high annual percentage rate (APR).

That’s the scenario we are working with here. You have an APR, or sometimes referred to as an interest rate despite being technically different, that is simply too high, and as you struggle to make monthly payments, interest starts accruing on top of the debt you already have. In a nut shell, your credit card debt is growing, and you can’t stop it.

So this leads us to the solution and topic of this article that was mentioned earlier – apply for a balance transfer credit card. There is one basic reason for doing this, and it revolves around handling your debt more easily and stymieing the growth of interest on top of your principal debt.

Get a Lower Interest Rate & Save Money

If you didn’t know, you can transfer debt from one card to another, hence the term balance transfer. There’s only one reason for doing this, and that is to secure a lower interest rate. So I literally just mentioned that you want to stymie the growth of interest. Logically speaking, if you are having trouble covering each monthly payment, then you need a lower interest rate for this to happen. This is where balance transfer credit cards come in!

When most people apply for balance transfer credit cards, they are trying to take advantage of some variation of a 0 percent balance transfer APR offer. Typically, a card will offer 0 percent APR on any balance transfer to that card for any period ranging between 6 to 21 months. This means you don’t accrue interest on the act of a balance transfer which is really only possible when there is an introductory offer for balance transfers. In short, it costs money in interest to transfer debt from one card to another, and the recently mentioned introductory balance transfer APR of 0 percent cuts that out of the equation.

So you save money with a low cost or no cost balance transfer. Then theoretically and hopefully, you will have transferred your debt to a credit card with a lower APR. So every month, less interest will build on top of your principal balance, and you should have an easier time paying back your debt.

There are a couple of limitations to this strategy of course. Most importantly, applying for a balance transfer credit card requires a credit card application. When you apply for a credit card, you get your credit pulled which means the card issuer is evaluating your credit history. There’s a chance that you may not have the required credit history to qualify for a new card. In short, if your credit is bad, then you may get rejected, even if it might help you pay back debt!

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