How To Establish Credit With A Secured Credit Card
Establishing good credit with no credit history can seem like a daunting task, but obtaining a secured credit card is one option that can help you build a strong credit foundation if managed responsibly.
Secured credit cards vary from traditional credit cards in a number of ways, the first being that they require cardholders to put down a security deposit to open the account. The deposit, which serves as collateral in the event that you cannot make the payment, is generally equal to your credit limit. This means if you put down a security deposit of $200, your credit limit would be equal to $200. Keep in mind that secured credit cards may carry fees and initial account setup costs, which will be deducted from your available credit limit when you open the account.
Your payment activity and account information will be reported to the three credit bureaus so it's important to make payments on time and avoid using too much of your available credit. Your payment history makes up 35 percent of your credit score, so timely and consistent payments will help you build a strong credit history.
Your credit utilization ratio — the amount of debt vs. your credit limit on your credit cards — makes up another 30 percent of your credit score. A lower utilization percentage is viewed more favorably by both both lenders and credit scoring models alike. For example, if your credit limit is $500 and you are currently
carrying a $250 balance, your credit utilization ratio is 50 percent, which creditors may consider too high. Try to use less than 10 percent of your available credit to build a strong credit history. Making small purchases and paying off the full balance each billing cycle may be the best way to start strengthening your credit.
Choosing the best secured card is as equally important as your payment history. Each card may come with a different set of fees, maintenance costs or annual percentage rates, so compare your options and read disclosure agreements closely before signing up. The APRs that accompany secured credit cards tend to be higher than those of traditional credit cards, so make sure you can handle the financial obligation to avoid paying high interest charges. Also, not all secured credit card issuers report customers' payment history to the credit bureaus. Make sure the card you choose reports to all three of the credit bureaus, otherwise all of your hard work will be in vain.
You will not develop a credit history overnight, but using your secured credit card responsibly will help you develop disciplined spending habits and build a stronger relationship with lenders. Responsible use over time will put you in the running to secure traditional credit cards with more attractive rates and fewer fees.
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