You probably already know how important your credit history is when it comes to your finances. If you want the best rate on a loan, you need a good credit score. If you want to save money on insurance premiums, your credit report matters. Having a good credit history can also influence your job prospects and ability to rent a home. If you have made mistakes, though, you know how hard it can be to rebuild your credit. One way you can help rebuild your credit is with the help of secured credit cards.
What is a Secured Credit Card?
A secured credit card is a card that is secured with some sort of payment. You keep a certain amount of money in an account, and that acts as “collateral” on your card. When you make regular payments, they are reported to the credit bureaus, and it shows up as positive activity on your credit report.
When looking into secured credit cards, though, you need to make sure you are getting a true credit card. Some secured cards are no more than prepaid debit cards. While these debit cards can be useful in some ways, the truth is that your payments won’t be reported to the credit bureaus; they are useless when it comes to re-establishing your good credit history. Ask a representative if the credit card you are getting will be reported to the credit bureaus. Then, make regular payments on the card each month.
Switching to an Unsecured Credit Card
Even with positive actions on your credit report as a result of your regular payments, it will still be slow going to rebuild your credit history. This is because secured credit cards are not viewed as favorably in the credit scoring algorithm as unsecured cards. Your goal should be to switch to an unsecured card after a few months. Usually, if you have made regular payments, and not gone over you limit, you can convert your secured credit card to an unsecured credit card after nine to 12 months.
An unsecured credit card will be more helpful in rebuilding your credit history than a secured card would be. Once you switch to a secured card, though, you will need to be careful not to fall into your old habits again. You will only rebuild your credit if you avoid the pitfalls of debt, and if you can stay out of the cycle of missed payments and over the limit charges.
Warnings about Secured Credit Cards
The biggest thing you have to watch out for with a secured credit card is the fee structure. Many secured credit cards come with high fees. You will have to pay activation fees, and may have other fees to pay. You should also make sure that the card is from a reputable bank, with a major credit card company logo. You will have the most success rebuilding your credit if the issuing bank is recognized, and if you have a Visa or MasterCard logo on the card.
Secured credit cards have their uses, and can be helpful in rebuilding credit. However, you need to make sure you are smart about how you use them, and show that you are responsible and credit worthy.