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Ellie Kravets' Blog

By Ellie Kravets, Realtor, ABR | Agent in San Francisco, CA

How Secured Cards Can Help You Build Credit

A secured card is a fantastic tool for building credit.

Whether you have no credit or you're looking to rebuild your credit after some damaging financial times, signing up for a secured card is a smart way to get your credit back on the right track.

With a secured card, your financial history or your lack of financial history won't be held against you. All borrowers are welcomed and approved.

How can a credit card approve everyone who applies? It's easy. Every secured card asks for a deposit, typically $200 to $300. Meet this deposit and you'll be approved for the card. This deposit acts as your credit limit and will be returned to you with interest when you cancel the card.

As you use a secured card, making purchases and paying your bill on time each month, the credit card company will report your account and your payment status to the three major credit bureaus. And voila, you are on your way to building up a positive credit history.

As with any credit card, the best thing for your credit is to charge no more than 10 percent of your credit limit. If you have $250 credit limit, that means you'll want to spend no more than $25 per month on your card. If you have a $300 credit limit, you'll want to spend no more than $30 per month.

So for purchases with a secured card, think small. Maybe treat yourself to a lunch or two each month with the card and that's it. Or think of a small purchase that you make every month anyway and use your secured card for that and nothing else. Remember: You're using your secured card as a credit-building tool, not a credit-borrowing tool. A secured card is a good choice for small purchases that you can comfortably pay in full each month. So do your best to charge no more than 10 percent of your credit limit with your secured card. Charging just $10 or $15 or $20 each month may seem like small, inconsequential use of your card, but it can do big things for your credit when you pay those small balances in full each and every month.

Here's why.

The FICO Credit score is the standard credit-scoring model used by lenders today. And 35 percent of the points that make up the FICO credit score is based on your payment history.

Establishing a solid payment history is an essential first step to improving any credit score. How do you build a solid payment history? It's easy. Just pay your secured card bill and all your other bills on time each month.

As mentioned above, charging 10 percent or less of a secured card's credit limit will also help boost your credit score.

Another key factor in your credit score is something called revolving utilization. This fancy term simply means the amount of a credit card's limit that you are using. Each of your credit cards is scored one at a time and then again collectively.

Every credit card account has a credit limit, the most you can charge with the card --- and a current balance, the amount you owe on a card.

To determine your utilization, divide your secured card's current balance by its credit limit. Then multiply that number by 100.

Let's look at an example. Let's say you have a $300 credit limit and you have a current balance of $15. Divide 15 (your current balance) by 300 (your credit limit) and you get 0.05. Multiply 0.05 by 100 and you get 5 percent. You're using 5 percent of your credit limit. Your revolving utilization is a healthy 5 percent.

Thirty percent of your FICO score is based on revolving utilization. The lower your revolving debt utilization, the more points you'll get on your credit score.

And that's why charging no more than 10 percent of your credit limit in any month is such an important guideline, especially when you're looking to boost your credit as quickly as you can.

In contrast, making a large purchase on a card with a low credit limit will actually hurt your credit. Let's say you charge $275 on a secured card with $300 credit limit. Charging so close to your credit limit will deduct points from your credit score, and that's even if you pay your balance in full that month.

Since using a secured card is all about building credit, you'll want to keep those purchase amounts as low as possible.

After six months to a year of responsible use with a secured card, your credit score will improve enough that you may be eligible for better card offers, including unsecured cards that don't require a deposit.

Your secured card issuer may offer you an unsecured card, and if it doesn't be sure to ask for one. And don't be afraid to shop around. There are deals are out there, and you and your improved credit deserve a good one.

by Lucy Lazarony from Credit.com

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