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Lorne Harvey

Do I Need A Secured Credit Card?

Saturday, February 9, 2013 - Article by: Lorne Harvey - Premier Mortgage Resources LLC - Message

What is a secured credit card?

A secured card is typically a Visa or Mastercard that is issued based on a security deposit that you make before the card company will grant you the credit line. Usually you will need to make a deposit in the same amount as the credit line you wish to have available on the credit card. In this sense, it works very much like a debit card, since you have to already have the money set aside to make charges on the card.

There is one very important difference between the secured card and a debit card, and that difference is how the credit bureaus view the secured card. Debit cards do not report your activity to the credit bureaus, so your debit card use is not a factor in your credit score.

These cards provide positive credit lines to help offset older negative accounts on your reports.

Why do secured cards help boost your credit score?

Secured cards appear to the credit bureaus like any other revolving line of credit. So if you deposit $500 into your secured card account, then you will see a $500 credit limit on the account reported to the credit bureau. I know it seems peculiar that going out and getting credit cards will improve your score... but this is how the game is played.
Do you need a secured card?

I highly recommend a secured card for anyone that has very bad credit and currently does not have any Visa or Mastercard credit lines. Especially, for anyone that has been turned down for one or more unsecured card offers recently. These cards are not for people that already have an unsecured card. If your credit is good enough to get an unsecured card then you can skip the secured card and work on your credit with other methods.

The fact is, having several revolving lines of credit on your credit reports is going to allow you to raise your credit score as fast as possible. I know it seems peculiar that going out and getting credit cards will improve your score... but this is how the game is played. You have to show responsible use of credit to build a high credit score.

What should you look for in a secured card?

There are quite a few options for secured cards that are not a good choice for consumers. Many have very high application fees and some even have monthly service charges just to maintain the account. There are 3 things that you should look for in a secured card:

1. Most importantly, the card needs to report to all 3 credit bureaus. This is the main reason you are getting the card, you will use it to establish positive credit history with each credit bureau. Don't assume that a card reports to all 3 bureaus, it's very common to only report to one credit bureau.
2. The card should have low or no annual fees and no application fee. Stay away from cards with hundreds of dollars in fees.
3. Ideally, the card issuer will have other credit cards available that are unsecured so that you can easily upgrade to an unsecured card with higher credit limit later as your credit improves.

How long will you need to use a secured card?

Let's face it, nobody really wants a credit card that requires you to pay up front. You might as well use a debit card, if it wasn't for the fact that debit cards don't report to the credit bureaus. So, these cards are a means to an end - they are not cards that you will plan on using for a long time. Typically, if you are on a path to rebuilding your credit, and are using your cards responsibly, you can expect to use a secured card for only 6-12 months. That should be enough time to raise your credit scores enough to qualify for an unsecured card.

How to use your secured card to raise your credit score:

It's pretty simple; you must pay every payment on time each and every month, and pay your balance down every month as well. You have to do this - if you miss a payment, you're going to be right back where you started and have to wait another 6-12 months to make progress toward an unsecured card.

Just pay the card balance down to zero each month and pay it off before the due date so that the balance doesn't show on your credit reports. Over time, you will see your credit scores rise significantly just based on this good payment history. These cards will tend to have low limits, since you are limited by your cash deposit and most people won't deposit thousands of dollars into the secured card account. This is a good thing, because it forces you to spend on the card sparingly and you won't end up with a large bill at the end of the month that you can't pay off.

What are the best choices for secured cards?

The best secured card available now is the First Progress Mastercard which also reports to all 3 credit bureaus.

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