Q: I am looking to rebuild my credit. Do secured credit cards help?
A: Because secured cards aren’t as common as unsecured, a lot of people don’t know much about them (which is to be expected considering that they are rarely advertised, so don’t feel bad for not knowing). They are great for bad credit, but do secured credit cards rebuild credit? Well, that depends…
Whether or not a secured card helps your credit score depends on two things (1) what type you get, and (2) how you use it.
Step #1: Get the right secured card
Not all of them have the ability to help you. In fact, some won’t do much for you besides just rob you with excessive fees.
Here’s what you need to look for when picking out a card:
- Reports your account to the credit bureaus – Whether or not a credit card has the potential to help you ultimately depends on this. If the card doesn’t report you to the credit bureaus, then it’s not going to do diddly squat to help your credit. Because credit reporting costs money for the card issuers, not every one of them does it. So make sure you choose secured credit cards that report to the credit bureaus.
- Don’t get ripped off with fees - The secured card industry is notorious for being sketchy and charging outrageous fees and rates. The bottom line is practically anyone can be approved for these types of cards, so don’t feel obligated to go with a specific card if the fees are exorbitant.
Step #2: Use your card the right way
Will they help your credit if you use them irresponsibly? No, they won’t! You can get the best secured card out there, but if you don’t manage your account properly, you probably won’t be helping your credit.
- Keep your balance below 30% of your limit – Did you know that a small portion of the FICO formula is based on credit utilization (the amount of credit you use). On revolving accounts (i.e. credit cards) it’s not good to use a high percentage of your credit line at any given time. As a rule of thumb, many personal finance experts recommend never exceeding 25% to 30% of your limit.And remember, the amount reported to the credit bureaus is the amount on your statement when the bill is issued. That means that even if you pay your bill in full every single month, the amount on your closing statement is what will be reported. So if your credit limit is $1,000 and you charge $800 every month and pay it off in full every month, your credit utilization would still be very high at 80% ($800 out of $1,000). So to make it easy, simply stay under 25% to 30% of your limit at all times.
- Pay your bills on time – as with any card, it’s important to pay your bills on time. Not only will you be avoiding those ridiculous late fees, but you will also be building a positive history of on-time payments.
Do secured credit cards help your credit? Yes, as long as they report to the credit bureaus and you use them responsibly. Do they rebuild credit the in the best way possible? Yes, I would say so… if you can’t qualify for unsecured, then it’s the only way I can think of to do it.