If you don’t have good credit, building and obtaining credit can be tough. You may have a hard time getting approved for loans, credit cards, or any transactions that rely on a good credit score. Fortunately, there are credit cards with guaranteed approval so you do not have to worry about being declined due to bad credit. Guaranteed approval credit cards will also give you the opportunity to begin rebuilding your credit.
Secured credit cards: guaranteed approval cards
Secured credit cards are often suggested as one of the best starting points for credit-building. A secured credit card is a kind of credit card that requires a security deposit which becomes your credit limit. Since this type of credit card requires a security deposit it is often also called a guaranteed approval credit card. Banks feel safe in approving anyone who can put down the security deposit. They know that if the client fails to pay, they will take the delinquent amount from the security deposit. Since its guaranteed approval, it makes a great starter credit card. It’s also used a lot by professional credit repair companies to REBUILD their clients’ credit.
- Interest rate. Not all cards are the same. Interest rates can vary a lot! Also, some secured credit cards are now offering “reward” options. BUT a lot of these secured reward credit cards have higher interest rates.
- Make sure the secured credit card you choose will report to at least 1 of the major credit bureaus. Ideally, they would report to all 3. If the credit card doesn’t report your activity, then you are not building credit.
- Make sure you know the rate and fees BEFORE you apply. There are a LOT of different banks and financial institutions that offer secured credit cards. Rates and fees will vary depending on the issuer.
Building credit using a secured credit card
Getting a secured credit card is one of the most ideal ways to build and improve your credit. It provides a training ground for better financial management since it still operates the same way as a traditional credit card. Once you get approved, you should develop and practice good spending habits for these will determine your future credit score.
Here are the things you need to take note of when rebuilding credit:
- Pay your bills. Remember that you are using this to build credit, not the other way around. Make sure you make all payments on time. A good way to do this will be to set up automatic bill pay so you don’t have to worry about it.
- If possible, pay in full and in advance. This will be reflected as good financial practice, hence improving your credit score. Also, you will not be charged with interest when you pay in full, so that is always a plus.
- Do not max out your card. Although a secured credit card generally has no restrictions when it comes to making purchases, abusing it can negatively impact your credit score. Try to keep your credit utilization ratio low (the percentage of your total credit that is being utilized) and keep your purchases as minimal as possible.
- Track your credit score. The purpose of your secured credit card is to improve your credit score. Invest in a credit monitoring service so you are alerted to any change to your credit score (good or bad)
Converting to an unsecured credit
With on-time payments, a secured credit card will often become unsecured after a year. This is an automatic process done by your issuing bank. And your security deposit is returned to you!
If your bank doesn’t convert your card after a year, you should contact them and see why. It could be that perhaps they have a record of late payments. Find out the reason and see what it will take to convert the card.
At the end of the day, secured credit cards are a great way to build or rebuild credit. Their guaranteed approval process has made it the “tool of choice” used by credit repair companies nationwide to rebuild their client’s credit. Just remember when you are looking for your secured credit card, that you do your research! Have a list of features you want your credit card to have. Make sure you know the rates and fees being charged.