After going through the worst financial crash since the Great Depression, it comes as no surprise that many Americans have been left with their credit in ruins. Rebuilding credit is always a challenge but it’s especially hard to do these days, considering how much stricter the banks are with giving out credit. For this reason a lot of people have been turning to secured credit cards to rebuild credit.
While it’s true secured cards are a great way to rebuild credit (since anyone can get them) they also involve a number of drawbacks. Below are five important tips about using them.
Tip #1: Pay Close Attention To The Fees
Secured cards are famous for charging all sorts of fees… annual fees, application fees, processing fees, and the list goes on. Not every card charges every fee (in fact, some charge none) but there are many that charge upwards of $300 in fees just for just the first year – that’s like paying almost a dollar per day just to have a credit card! So when you’re picking out a secured credit card make sure you pay close attention to the fees because they can vary greatly be card.
Tip #2: Consider Credit Unions
If you are a member of a credit union, then I would recommend first checking with them to see if they offer a secured card. Some credit unions offer these cards with no fees whatsoever. If you’re not a credit union member, then check to see which ones are in your area that you might be eligible to join.
Tip #3: Don’t Carry a Balance
Many folks assume that secured credit cards to rebuild credit work better if a balance is carried, but that’s not how it works at all! For both secured and unsecured cards, its your closing statement balance amount that gets reported each month. So if you use your card every month and pay it off in full every month, that works just fine. There’s no need to benefit in carrying a balance if you are using your account on a monthly basis.
Tip #4: Don’t Spend Too Much
Another wrong assumption is that the more you spend, the more it will help your credit score. That’s not necessarily true because if you use a high percentage of your credit limit at any given time, it may actually hurt your score! This applies to all types of credit cards – using too much of your available credit will adversely impact your FICO. So try and stay below 30% of your total credit line at any given time on your secured card.
Tip #5: Know When It’s Time For Something Better
If your secured credit card doesn’t have any fees, then you might as well keep it open for a couple years or more. However if you are paying the typical $100 to $200 per year to have a secured credit card, then you will want to move onto something better (i.e. unsecured, no fees) as soon as possible to avoid paying fees unnecessarily. How do you know when the right time is? Well there is no universal answer, so keep tabs on your credit report and check the forums to see how long it takes for people in similar situations to qualify for an unsecured starter credit card. My guess would be within 9 to 18 months on average.