How to graduate your Secured Credit Card within a year
Today, credit building and credit repair are a big deal. The housing market is currently doing well and people who may not have been approved for a home loan a few years ago are currently being approved. Whether or not some of the loans are subprime loans is another topic. You even have music artist such as Jay-Z mentioning the importance of credit in one of his songs “The Story of OJ.” If you’re looking for a way to improve or build your credit, a secured credit card is one of the tools an individual can use to get their credit score to rise.
How to get started.
Difference between unsecured and secured credit cards
There are unsecured credit cards and charge cards, and then there are secured credit cards. Charge cards and unsecured credit cards are normally for people with an established credit history or good credit. There are some instances where people with bad credit are approved for unsecured credit cards, but the percentages of that are low. Unlike secured cards, you are not required to put a deposit down on an unsecured credit card. The bank normally determines your credit limit for you based on your credit. A secured credit card is a credit card that has a balance set by the customer. Banks and credit card companies who distribute secured credit cards require their customers to put a deposit on the secured credit card. The amount of the deposit will be your credit limit for your secured card. So, if your deposit for your card is $500, your credit limit will be $500. If you’re deposit is $1,000, your credit limit will be $1,000. Your deposit is collateral for the lender (bank) just in case you default on your balance. Do yourself a favor and view your deposit amount as an investment, because that’s basically what it is. More on that later.
How do I sign up for a secured credit card?
Depending on your credit, you may already be receiving offers in the mail for a secured credit card, especially if you currently have bad to fair credit, and a checking account with a bank that offers secured credit cards. If not, you can simply go to the banks website and inquire about their secured credit cards. Some banks do not have information about secured credit cards listed on their website. There is an option you can take with getting a secured credit card through a bank. You can either call your bank and inquire about a secured credit card. They’ll more than likely have to do a hard inquiry on your credit report in order to view your credit report and determine whether or not they want to offer you a secured card. Another way is to apply for an unsecured credit card with the bank. In this case, they’ll have to do a hard inquiry on your credit report also, in order to determine if you qualify for the unsecured credit card. If you’re not approved for the unsecured credit card, some banks will immediately offer you to apply for their secured credit card. Discover introduced their Secured credit card a few years ago. I recommend applying for the Discover secured credit card before any other secured card. Reason being is the Discover secured card reports to the 3 credit bureaus (Transunion, Equifax, Experian) as a normal credit card. With Discover, the minimum deposit required is only $200. I believe that deposit is less than the other secured credit cards. Some of the other unsecured cards report as unsecured cards. Also, you have the ability to graduate your secured card to a normal card. I have walked numerous people through this process, and they all had their secured cards graduate, and just about all of their cards were graduated within a year’s timeframe.
How do I get my secured credit card to graduate to an unsecured card?
There are rules to follow. The better you follow these rules, the better chance of success you will have. One thing to keep in mind is there is no guarantee a bank will graduate you within a year’s timeframe, but there are a lot of people who can testify that there’s a great chance your secured card will graduate within a year if you take these steps.
1.) Keep your monthly utilization low. The common percentage of utilization you want to use less than every month is 30%. Me personally, I would advise you to keep your credit card utilization under 10%.
What is utilization? Lets say your credit limit for your secured card is $500. You want to make sure you spend no more than $50/month. I know it will probably seem like you’re cheating yourself, because that $500 dollars is your investment, but trust me it will pay off in the end.
2.) Pay off your balance every month. This is very important. I cannot stress the importance of this anymore. Do not carry over a balance on your secured credit card. I’ll say it again, do not carry over a balance on your secured credit card. Also, do not make late payments on your secured credit card. Try to pay your bill every month at least 5 days before your bills due date. Be mindful of weekends as well. I would recommend paying your bill 10 days prior to the due date, but I know some people have financial situations where they’re not able to.
3.) Pay your other bills on time. If you have a phone bill, utility, car note, or any bill that will be reported to the credit bureaus, pay them on time. When a bank gives you a secured credit card, you’re basically auditioning for that bank. They want to see if you’re gonna be disciplined and responsible with your payments. Getting extra dings on your credit report will not be a good look. Also, keep your credit hard inquiries down. Meaning, don’t go applying for a lot of loans or other credit cards. If you want to sign up for another secured card with another bank, you can. However, I would keep the limit at 2 secured credit cards maximum.
4.) Most important. Be patient. The bank will graduate your secured credit card when they’re ready to. If your secured card starts getting close to a year old, don’t become discouraged and lose discipline. Stay focused, follow the plan, and eventually your secured card will be graduating to an unsecured card.
I saved the best for last. Remember earlier in this post when I stated a secured credit card is an investment. Well, if and when your secured credit card does graduate, you get your deposit amount back, and you get to keep your credit card. Only thing now, your credit card will be an unsecured one. Then in time you can start inquiring about credit limit increases and other perks and benefits that are available for unsecured card members. Personally, I think secured credit cards are one of the best financial tools ever created. If you use them the right way, not only will they help you build, repair, and establish credit, they will also help improve your discipline and financial habits. I hope this post helps you along the way to graduating your secured credit card.
Photos courtesy of: CNN money and American Express