If you have a very poor credit score a secured credit card can help you increase it.
You can apply for a secured credit card at your local financial institution or online. And the way it works is that you deposit a sum of money and the limit on your secured credit card is equal to the amount you deposited. For example, if you deposit $1,000 your limit on that card will be $1,000.
You would use your secured credit card the same way you would use any other credit card. You can use it when you go shopping, book a hotel, rent a car, and so on. And a secured credit card looks exactly like a traditional card, so no one will know the difference. Meaning the card will not scream out ?I have a low credit score?. So from that perspective you have nothing to worry about.
Once you have an outstanding balance you are expected to make monthly payments, either in full or at least the minimum monthly payment.
And as you make your payments on time your financial institution should report your payment status to the Credit Bureaus. Before you apply for a secured credit card you will want to confirm this.
As long as you keep your payments current, after six months or more, you will begin to see an increase in your credit score.
But before you run out and apply for a secured credit card you need to understand the risks associated with these cards.
The interest rate on secured credit cards is typically very high. The average rate is 19.99%. And yes, even though you have deposited a sum of money upfront, you will still pay interest on any balance that is outstanding from purchases you made when using that credit card, just as you would with a traditional credit card.
Also, secured credit cards usually charge an annual fee just to carry the card, regardless of whether you use it or not. The average cost is $79.00.
And if you, for whatever reason, do not make your payments on time, that too will be reported to the Credit Bureau, which will decrease your credit score and negate the whole point of having a secured card.
If you have declared bankruptcy or have other reasons for having a very low credit score, and you want to work on increasing it, using a secured credit card will help. To mitigate some of the above issues, make sure you shop around and make sure you deal with a legitimate financial institution, preferably one you have used in the past. And only apply for a card if you can actually afford one, because remember, you are handing over a deposit of money, and you will not have access to that money as long as you have that card.
