When you’re faced with the situation of having no credit, you might be surprised at how creditors treat you. It can often feel like you’ve been lumped into the same group as people with bad credit. This is because creditors use your past credit history to determine whether you are or will be a responsible borrower. If you have no past history, there’s no pattern to establish your credit worthiness.
This wouldn’t be a significant issue if it weren’t for the fact that credit has become such an integral part of our society. Employers use it when looking for potential hires, auto insurance companies use it to determine rates, not to mention the savings a high credit score can bring you in interest rates alone. The problem is that you need credit in order to have credit. Luckily, there are a few steps you can take to get you on the right track towards building credit and achieving a high credit score.
Get a secured credit card.
Secured credit cards work the same way as regular credit cards, except they require a deposit. The amount you are allowed to borrow usually reflects the exact amount of the deposit you paid or a percentage of that deposit. One common misconception regarding secured cards, however, is that they work like debit cards. This is not true. The creditor only uses your deposit as a guarantee in the event of non-payment. When you make a charge on your card, you need to pay that amount back just like a normal credit card. The payment will not be taken out of your deposit. There are a number of secured credit cards to choose from.
Only charge what you KNOW you can pay off in FULL each month.
Now that you have a card, you need to show that you are a responsible borrower. To do this, you need to make sure that you only charge what you absolutely know you can pay off each month. If you pay off your balance in full each month, you’ll avoid interest rates.
As much as the temptation exists to spend your newfound access to money on something splurge-worthy, the best use for your credit card money is to pay something you’ve already budgeted for each month. Some ideas include gym memberships, subscription services and other routine purchases.
Keep your balance under 30%.
A very little known fact is what we like to call the 30% rule or your utilization rate. When your overall balance goes over 30% of your credit limit, your credit score is negatively affected. That means if your credit limit is $500, your balance should never go over $150. In fact, it’s wise to keep it even lower because many credit card companies actual report lower credit limits than what you actually have, therefore increasing your percentage.
Pay your bills on time, EVERY month.
There’s no need to fall into the trap of creating more debt. To avoid unnecessary interest rates and dips in your credit report, make sure you pay your bills on time every single month. To make sure you’re covered, we recommend setting up automated payments. That way no matter what is going on in your life, your credit score isn’t going to suffer from forgetfulness.
Monitor your credit report.
The point of building your credit is to get a high score, so it makes sense to keep an eye on that statistic. 80% of all credit reports have errors, making it even more crucial to stay on top of things. Don’t fall victim to the free credit report sites either. When you need to get your credit report, make sure it’s giving you your FICO score.
Apply for an unsecured card after about a year.
Once you’ve had a good amount of time with good credit payment history you should be eligible to receive an unsecured credit card. Call your creditor to see if you qualify for a move from an unsecured account to a secured account. Unsecured cards carry many benefits such as higher limits and reward perks. Just keep in mind the same tips when using your credit card.
Building credit can be a slow process that requires a lot of patience. However, like most things, it will be worth the wait whenever you need to make a large purchase or an emergency situation arises.
Tag: secured credit cards
Bad Credit: Improving Your Credit Score Through Secured Credit Cards
For many people who’ve experienced financial issue getting credit in order to build your credit back up can become a huge issue. If you’re in this situation, don’t worry, there are still a few good options for you. One of these options that we recommend for fixing your bad credit is opening up secured credit card accounts.
What exactly is a secured credit card? A secured credit card is just like a regular credit card, but with one major difference. Your credit limit is secured with a cash deposit that the company will use if you default on your payments. It is important to understand that having a secured credit card does not mean you don’t have to pay your bill every month. These are not pre-paid debit cards where you spend the money that is in the account. They act exactly like regular credit cards where you are charged interest on your balance and late fees if you don’t make your payments every month!
Now, this might seem like a bad deal to the consumer, however, in order to help you build a good credit score your debtor needs to make sure they are covered in case history repeats itself. Here’s a look at exactly how they work:
- You choose a credit limit and make a deposit to secure that credit limit.
- The credit card company will issue you a credit card with that pre-set credit limit.
- You make purchases and payments just like you would with a regular card.
- After you have built a good credit history, you can request that card be converted to an unsecured card and to have your deposit refunded.
Also, if you decide that you do not wish to have that credit card anymore and close the account, the card company will refund your deposit, after any balance owing has been paid of course.
Why should you get a secured card?
There are two main reasons: First, if you don’t qualify for an unsecured card, they are fantastic ways to build your credit score… as long as you get the right card. The second reason you should get a secured credit card is that there are a lot of businesses that will not let you use their services if you do not have a credit card. Most car rental companies, for example, will not rent a car to you if you do not have a major credit card. For them, the fact that you have a credit card means that you are less of a risk when it comes to letting you loose in their car.
A few words about using your card…
There’s more to credit than just having a credit card. In fact, in order to build your credit, you will need to have between three and five credit cards. You’ll also need to make sure your balance never goes over 30% of your credit limit, even if you pay off the entire balance every month. Using just 30% of your credit limit shows the banks that you are responsible with your credit and are able to live within your means.
Secured Credit Cards: Avoid ‘em or Embrace ‘em?
In a lot of ways, secured credit cards sound like a raw deal. But if you have poor credit, secured credit cards might be your ticket to a great credit score.
Basically, secured credit cards—typically for people with bad credit—require you to pay a deposit that is equal to or greater than the limit before the card will be activated. Then, you can use the account as you would any other credit card. You would also pay the bill, just like you would any other credit card.
So, let’s imagine that you have a secured credit card with a limit of $500. Just to open the account, you would need to make a deposit of $500. Subsequently, you might charge $200 worth of stuff to the card.
Will the secured credit card company automatically apply the deposit to your balance? Nope—you need to pay the $200 bill, just as you would any other credit card. If you make payments, the balance will incur interest. And if you miss payments, the late payments will be reported to the credit-scoring bureaus, and your credit score will suffer, just as with a traditional (unsecured) credit card.
All the while, the bank holds onto your deposit. If you eventually default, the credit card company will keep your deposit, but only after they have turned you over to a collection agency and attempted to collect payment from you.
In short, secured credit cards require you to pay now, buy later, and then pay again, whereas traditional credit cards allow you to buy now, pay later.
If you make payments on time and learn how to build credit, you can eventually request that the secured credit card be transferred to a traditional credit card, at which point the bank will refund your deposit. The deposit will also be refunded if you close the credit card account, so long as you have no balance at the time.
Though secured credit cards might not seem like that great of a deal, they are necessary for two reasons. First, people with bad credit often cannot qualify for traditional credit cards, so secured credit cards allow them to build their credit scores (in this way, they are much like authorized users). Second, many businesses require that their customers have credit cards. For instance, most cell phone companies won’t give you a phone without a credit card—secured or otherwise.
As I mentioned, if you pay the bill on time and keep your utilization rate (the percentage of the balance held against the limit) under 30 percent, then a secured credit card will help your credit score just like any other credit card would. And as your credit card score begins to improve, you can contact the credit card company and ask if it can switch the card to unsecured.
While secured credit cards have high interest rates and force you to set aside a sizable amount of money as a deposit, they are an attractive way to rebuild your credit. Use them in the right way—with careful purchases and repaying your debt on time—and you’ll soon be back in the good graces of your credit card company.
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