Credit Utilization: Maintaining The Right Credit Balance to Limit Ratio
There’s an age-old saying that, “it takes money to make money.”
Well, it also applies to credit cards and credit scores. You have to have a card to rehabilitate your credit score.
Of course, if your score is too low, then you will likely be rejected when applying for a card. So, what gives?
If you are unable to get a regular credit card at even a low limit, you may need to look into a secured credit card.
By getting a secured credit card and responsibly making the payments each month, you can start the process of demonstrating to the credit bureaus and future lenders that you are capable of making payments on time.
How Does a Secured Credit Card Work?
Whereas a regular card is unsecured, meaning that the creditor has no collateral that they can recover if you default on the payment, secured cards have a deposit.
Usually, your credit limit is anywhere from half the size of the deposit you make to 100 percent
You leave that deposit with the credit card issuer, then make your payments each month like you would with a normal card.
It’s a good idea to pay off your balance each month. If you near or reach your limit, the creditor can freeze the card and keep the deposit to avoid any losses.
Often I am asked whether I recommend a secured credit card over a high-interest rate credit card for people in the process of fixing their bad credit.
The short answer is that I recommend a secured credit card.
Make Sure the Card is Not Reported as “Secure”
However, it should be stated that I will only recommend a secured credit card if the provider will do one thing: withhold that the card is secured from the credit agencies.
A secured credit card recorded as such will not improve your credit very much –in some cases, it can even hurt it.
Credit Utilization Calculator
Luckily, through the wonders of competition, there are very few card providers still out there that will record a secured credit card as secured.
As a matter of fact, you will likely find that most secured credit card providers will openly advertise that they do not report the card as secured.
This is a big selling point.
Can a Secured Credit Card Improve My Credit Score?
You can expect your credit to improve substantially if you haven’t had any credit card activity on your account for a while (ex., if your credit card accounts have been closed or noted as charge offs.).
Remember: having positive, recent credit activity is a very important factor in determining your credit score. Simply cleaning up your credit history and removing bad accounts will alone only help your credit score so much.
How Much is the Deposit for a Secured Credit Card?
Secured credit cards require an initial deposit before they will open the account, (i.e., before they will “secure” that deposit). Every provider has their own minimum deposits, but you’ll be looking at around $200 – $300 to start out with.
Orchard Bank’s secured card, which I recommend, have a minimum deposit of $200.
Improve Your Score by Depositing More
It’s important not to simply deposit $200 and start using the card. Why? Because a credit card with a $200 balance will do little to improve your credit score.
This will, in fact, hurt your credit if you have other cards with higher balances.
Therefore, it’s best to increase the limit whenever you can –deposit another $100, for example, when you have the extra money.
This will increase the credit limit recorded on your credit report.
After you have had the secured credit card for a year, call them and ask if they are willing to switch it over to unsecured.
Most of the time, (if your payments have been good), they are more than happy to make the switch and give you an increased credit limit.
Using Secured Credit Cards to Build Your Credit
Here are my top 3 tips for using secured credit cards to improve your credit:
- Make sure the provider reports to all 3 credit bureaus and they don’t annotate that the card is secured.
- Be ready to make an initial deposit and keep depositing to increase your credit limit. This is what will increase your credit score.
- Keep the card for at least a year before requesting that it be switched to unsecured and your credit limit be increased.
How to Reopen a Closed Credit Card Account