Do you need a credit card for poor credit? How to tellCredit cards nowadays are a necessary convenience. If you have poor credit, or no credit history at all, you’ll likely be declined for most types of financing. Secured credit cards are one of the best ways to build or repair credit. Secured cards require you to put down a security deposit, and that means the approval qualifications are more relaxed than other cards. But that doesn’t mean you’ll always be approved. If your credit history is filled with red flags, like bankruptcy or multiple missed payments, it can be difficult to get approved — even for a secured card.
Is it better to have a secured card or an unsecured card?Both card types are valuable tools when you want to rebuild your credit. An unsecured credit card’s approval conditions focus on credit history. A minimum fair to average credit is needed to get approved. A secured card is a good solution for consumers with a poor credit history who can’t qualify for an unsecured card. Some of the best secured credit cards don’t require a credit check or bank account. Your deposit often becomes your credit limit.
How to rebuild your credit scoreNo matter what type of card you have, always treat your card like cash. Don’t spend more than you can pay in full every month. If you carry a balance from month to month, you’ll risk paying a bunch in interest charges and further damaging your credit score — both of which can be a severe blow to your financial health. Secured cards report to credit bureaus like any other revolving line of credit. Just make sure you observe responsible credit use when making purchases and payments on your secured card. That means paying on time and, if possible, paying off your balance in full every month. In terms of credit building, a secured credit card is no different than using an unsecured (regular) credit card. Used responsibly, you could begin to see your credit score improve in as little as six months. Just be sure to keep your credit utilization ratio below 30%. Since secured credit cards use your deposit as the credit limit, it’s easy to feel like you can max it out without consequences. But if you have a $250 credit limit, a month-to-month balance of just $80 will increase your credit utilization above 30%, and your credit score could be affected.
How to use a secured credit card to build or rebuild your credit:It isn’t hard to apply for a secured credit card, but the most important thing to remember is to comparison shop and read the fine print. Not all secured credit cards are alike. You’ll want to look at:
- Have the right mindset for a secured credit card: If you’re going to apply for a secured credit card, you want to make sure that you’re in a financially good — or at least decent — place. In other words, are you paying your other bills on time? Do you feel like you’re on track? You may have had some rough times that hurt your credit — are you past them? Because you can still end up paying interest and getting late fees with a secured credit card, even though you’re borrowing against your own deposit. You don’t want to get into a position where you’re missing payments and your secured card is costing you even more money and making your credit score worse.
- Make small purchases: This isn’t the time to max out your secured credit card. If you really want to show your card issuer that things are different, use your secured credit card regularly – but on small, necessary purchases you can pay off right away. Fill up your tank with gas, but then pay it off — preferably, immediately.
- Pay your bill on time: That’s pretty obvious, right? Your on-time payment history is the single biggest factor in your credit score. No need to elaborate. Just don’t be late with a payment.
- Don’t carry a balance: It won’t necessarily kill your credit score if you carry one, but it won’t help it, and raising your score is the goal, right? So beyond just making your payments on time, make sure you pay off the whole balance, every month. That will show your secured credit card issuer that you’re turning over a new leaf.
- Keep your credit utilization ratio low: We just mentioned this, but let’s say it again: Lenders like to see a credit card user, whether you have a secured credit card or an unsecured one, use no more than 30% of their available credit each month. So if you have a $200 credit limit, try to spend no more than $60 before you pay it off. Yes, it’s annoying, and it means you won’t be buying much more than a tank of gas at a time. But if you want to build your credit, lenders need to see that you have willpower and aren’t coming anywhere close to maxing out your card every month.
- Make sure your secured credit card reports to the credit bureaus: Not just two. Not one. All three of them. You can be the most responsible credit card user in the world, but it doesn’t do you much good if the credit bureaus aren’t getting any information about your balances and how quickly you pay them off.