We get it. We all make mistakes in the past and now we’re in a frantic rush to rebuild our credit scores. The days of having thousands of dollars in credit limit is over and now it seems impossible to even get approved for a credit card.
Luckily there are credit cards designed specifically to help people rebuild their credit scores. You won’t have the luxury of earning reward points, but this should be the last thing on your mind. If you’re thinking of applying for a secured credit card, it’s important to understand how to use this to your full advantage.
What is a Secured Credit Card?
A secured credit card doesn’t require a minimum FICO score to get approved. Instead, you must put up collateral (cash) to secure your credit line. You can use this identical to every other credit cards out there.
The cash you deposit is secured in an account that you’ll get back if and when you decide to close your account. Some issuers will actually put this into an interest bearing account which will allow you to earn interest instead of having the money sit there doing nothing. Most issuers will require a $300 minimum deposit to establish your account and some go as high as $10,000.
4 Step process to Find the Best Secured Credit Card
- Look At Total Annual Fee- Almost every single secured credit card comes with annual fees. These fees typically range from $30-$99. The first thing you should think about is how much you’re going to set up your initial credit line at. If your credit line is going to be $300, you’ll want to choose the one with the lowest annual fee. Cards with a $99 annual fee will typically come with additional perks such as cash back rewards or additional credit monitoring tools. These generally won’t be worth it since there are many free credit monitoring tools out there. You’ll also need to make a lot of purchases to justify the $99 annual fee to receive enough cash back to make it worthwhile.
- Reporting to all 3 Major Credit Bureaus- If you’re applying for a secured card, your one and only goal is to improve your credit. Make sure the issuer will be reporting to all three major credit bureaus every month (Experian, Transunion, and Equifax).
- Understand the Interest Rate- Secured cards will generally come with a higher interest rate than unsecured credit cards. That’s okay though-you should be paying off your balance in full every single month. Your interest rate can vary dramatically between each issuer, typically anywhere from 9.99%-19.99%. To learn more about APR and interest rates, you can check out an in-depth article we wrote in the past. The next thing to check is to see if the rate is fixed or variable.
- Understand What Happens to your Deposit– Some issuers will keep your security deposit in an interest bearing account. For example, USAA will keep the money in a 2-year COD (Certificate of Deposit) that earns interest at a variable rate. In all cases, you’re entitled to the security deposit once you either close your account or upgrade your account to an unsecured line of credit.
How To Use The Secured Card to Actually Improve Your Credit
Now that you know how to pick the best secured credit cards, here’s what you can do to improve your credit over time.
We all know that your payment history accounts for 35% of your credit score, so it goes without saying that you must pay your bills on time. For anyone that’s looking for a secured card, my number one tip is to always put a cap to your spending every month at 33% of your limit.
So for example, if your credit limit is $1,000, don’t spend over $333 each month. This is important because it’s a lot easier to pay off your bill every month when it’s not near it’s credit limit. If you’re always spending at the top of your limit, it’s going to be more difficult to pay off the account each month. You might find yourself paying only half of it, and then the following month adding a few hundred bucks on top of it. Don’t fall into the trap of thinking it’s “access to free money.”
The Next Step: Fix Your Credit Report
There are a lot of great tools out there today to help you monitor your credit. You can check out Credit Karma, Credit Sesame, or Annual Credit Report to get an inside look at your credit report.
Use this time to catch up on bills and work with your creditors to come up with a payment plan if you’re behind on payments. All the little things you do can and will go a long way.
List of Best Credit Cards to Rebuild Your Credit
Now that you know how to pick the best credit card and know what to look out for, ReadyForZero handpicked the best cards out there to help you get back on track. Remember, always look at the annual fees and make sure the issuer reports back to all three credit bureaus.
After you’ve consecutive timely payments, you can always ask your creditor to switch you over to an unsecured credit card. Taking these baby steps will ensure that you get back on track to restoring your credit.