iQuanti: Are you having trouble qualifying for an unsecured - sometimes referred to as a "regular" - credit card? Or maybe you'd like the opportunity to try and rebuild your credit history?
If so, you may want to consider another type of credit card known as a secured credit card. In this post, we'll talk about how does a secured credit card work and how it could be your ticket to improving your FICO Score.
How Does a Secured Credit Card Work?
On the surface, a secured credit card functions just the same as an unsecured credit card. You'll use it to make purchases and at the end of the billing cycle, you'll receive a statement with how much you owe.
The major difference is the collateral. With a secured credit card, you'll pay a security deposit before the financial company issues you a credit card.
Asking for this deposit shifts the risk away from the card issuer. This is why people with a poor credit history will have an easier time being accepted for these types of cards.
The security deposit is usually somewhere between $200 and $300. It is only generally used if you don't make your payment. It can also be refundable after you close your account.
How to Use a Secured Credit Card to Rebuild Your Credit
Once you've been accepted for a secured credit card, here's what you can do to try and help re-establish your credit history.
Make Payments on Time and in Full
This can be considered one of the single most important things you can prove to any creditor in the world - that you're a reliable payee. To help prove this, pay your bill well before the due date and in full every time you receive it.
This action alone can possibly account for 35 percent of your FICO Score. An easy way to possibly never miss a payment is to simply turn on the auto-pay feature within your account.
Keep Your Credit Utilization Ratio Low
Even though you may have a credit limit, using too much of it can be perceived as a risk by creditors. That's why it's important to be mindful of how much you're charging to your credit cards and to keep it as low as possible (below 30 percent can be considered a good rule of thumb).
For example, if your credit limit is $5,000, then consider not spend more than $1,500. Minding your balance can possibly contribute to 30 percent of your FICO Score.
Don't Apply for Any Other Cards
Every time you apply for a new credit card or loan, the financial institution will most likely do what's called a "hard pull" of your credit report. Generally, five or more of these hard pulls over 12 months can hurt your score.
A better approach would be considered to do nothing at all. Simply use your new secured card and don't apply for any new cards. This will hopefully give any previous inquiries time to fall away and can contribute positively to possibly 10 percent of your FICO Score.
Keep Your Card Open
Eventually, if your credit score increases, you may wish to upgrade to a more exclusive credit card with better rewards or other perks. That's perfectly normal. However, to try and help your credit score, don't call and cancel your secured card.
The length of your credit history can count for possibly 15 percent of your FICO Score and can be measured by your longest active card. Therefore, keeping your credit cards open for as long as possible will help boost your score - even if you're not using them. Simply put the card in your drawer and let it help add points to your credit score.
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Original Source: How a Secured Credit Card Can Boost Your Credit Score
