What is a Secured Credit Card & How Does it Help Build Credit?
What is a Secured Credit Card & How Does it Help Build Credit?
Posted on July 5, 2022
Our auto loans team will often recommend using a secured credit card to help those with bad credit. It’s one of a few tools you have that can help rebuild your score. But what is it and how can a secured credit card help you qualify for an auto loan?
We asked our Campbellville auto loans team to explain.
What is a secured credit card?
A secured credit card works in a similar way to a standard credit card but uses a cash deposit system to guarantee payments.
You open the card account as normal but provide a cash deposit of the same value as the credit limit. As you use the card, you make monthly payments as normal but if you miss a payment, it’s taken from your deposit.
It’s like a guarantee system that lowers the risk for the card issuer and allows them to provide credit card facilities to those with bad credit.
It’s an excellent way to help rebuild credit after bankruptcy or other situation where a normal credit card isn’t suitable.
How does a secured credit card help rebuild credit?
A secured credit card helps you rebuild credit by helping create a payment history.
Your payment history makes up to 35% of your credit score, so anything you can do to rebuild it can have a significant impact on your score. If a standard credit card isn’t suitable, a secured card can help with this.
As long as you don’t miss a payment and use the card regularly, your monthly payment is logged on your credit report and will incrementally improve your score.
A secured credit card can also have a minor impact on your credit mix. This is a measure of how many sources of credit you have. The more lines of credit you have available, the more positive the impact.
Just don’t go crazy with the card as maxing it out can impact your credit utilization!
How long will it take to improve your credit score?
Unfortunately, it’s impossible to give an exact timeframe. Much depends on your current credit score and financial situation.
On average, you can expect to begin seeing improvements within 3 months, more significant improvements within 6 months. It is possible to go from bad credit to excellent credit within 18-24 months, depending on what else you’re doing to improve your situation.
A secured credit card is one of the easiest ways to rebuild credit. As long as you use it sensibly, never miss a payment and pay it off in full each month, they are a cheap form of credit.
Once your score has improved enough for a standard credit card, you can switch to that and continue the good work!
Once you have a payment history and are recovering from the situation, you can also apply for a bad credit car loan should you need to.
When you’re ready for a car lease or loan, get in touch with the Campbellville auto loan experts at Northway Ford for great deals on auto finance.
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