Secured credit cards can be a helpful tool in building credit because they provide an opportunity for individuals with limited or poor credit history to establish or improve their creditworthiness. We have partners at HomeLoanGurus that can provide you a secured card.
Here's how secured credit cards can help build credit:
Security deposit: Secured credit cards require a security deposit, which serves as collateral for the credit limit. The deposit acts as a safeguard for the credit card issuer in case the cardholder fails to make payments. This reduces the risk for the credit card issuer and makes it easier for individuals with low credit scores or no credit history to be approved for the card.
Credit reporting: Most secured credit card issuers report cardholders' payment history and credit utilization to the major credit bureaus, such as Equifax, Experian, and TransUnion. Consistently making on-time payments and keeping credit utilization low can positively impact the individual's credit score over time.
Credit limit: The credit limit on a secured credit card is typically equal to the amount of the security deposit. By keeping credit utilization low, which is the percentage of the credit limit used, individuals can demonstrate responsible credit management and potentially improve their credit score.
Payment history: Paying the monthly bills on time is a crucial factor in building credit. Making timely payments on a secured credit card can help establish a positive payment history, which is a significant component of credit scores.
Graduation to an unsecured credit card: Some secured credit card issuers offer the option to "graduate" to an unsecured credit card after a period of responsible credit card usage. This may involve returning the security deposit and converting the secured credit card into an unsecured credit card with a higher credit limit, which can further help build credit.
Credit monitoring and financial education: Many secured credit card issuers provide tools for cardholders to monitor their credit, track their progress, and offer financial education resources to help them understand how credit works and how to manage it responsibly.
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In summary, secured credit cards can be a helpful tool for building credit by providing an opportunity to establish a positive payment history, keep credit utilization low, and demonstrate responsible credit management. It's important to use secured credit cards responsibly and make timely payments to maximize the benefits of credit building.