Why Secured Credit Cards Help Improve Credit ScoresIf you think about what credit scores are designed to portray, it's easy to see how proper use of any type of credit card, including secured options can help. The simple fact is, your credit score is the easiest way for lenders to gauge risk vs. reward when allowing you to borrow the money you need. Your score is based on tons of different factors, and no one but FICO knows exactly what those factors are. However, by looking at factors that correlate with good scores, you can get a good idea of what gives your score a bump and what can take it down a notch. Here are the different factors that secured credit cards help to improve with proper use or help to fall as a result of poor use...
- Percentage Of Credit Limit Used On Revolving Loans - It's no secret, if you look at the stats, it's easy to see that those who use less than 50% of overall revolving credit lines(credit cards, personal loans, etc) tend to have higher credit scores than those who use more than 50% of their available credit. That being said, if you do go the secured credit card route, make sure to keep your balance below 50% of your credit limit.
- Average Age Of Accounts - Many experts believe that the older your accounts are on average, the better your credit score is. That makes sense too. If you have accounts for longer periods of time, it shows that those accounts are being used properly. If they weren't the account wouldn't be open very long! Therefore, the earlier you get started on building aged accounts in your credit report, the better.
- Payment History - Now this one's a no-brainer. If you've got poor payment history, you've got poor credit scores. If you maintain positive payment practices, you'll be able to watch your score go up!
Are There Any Alternatives To Secured Credit Cards?No matter what you're talking about, there are always alternatives! This is also true with secured credit cards. Although, there are tons of different things that you can do that will improve your credit, and I'll go over all of them below, there is only one that I've found to be as effective as secured credit cards. That option is personal lines of credit. We'll go over those first... Your Alternatives
- Personal Lines Of Credit - A personal line of credit works a lot like a credit card. You're given a credit limit and you can pull money as necessary up to that limit. Your payment is based on your balance just like credit cards, and on your credit report, they're just about identical. The only problem is, if you've got bad credit scores, you'll have a hard time getting approved for any line of credit that doesn't require some type of security. Even if you do have something that you can sign off as collateral, it will still be pretty hard to find a personal line of credit for people with bad scores. However, it is possible to find with enough research.
- Buy A Car On Credit - This is an option that's mentioned quite a bit in the personal finance blogosphere. The truth is, just about anyone can buy a car, even with bad credit there are lenders that are more than happy to charge you tons of interest on a secured loan. But, I've got a beef with this option. Let's think about how much a car costs. At the very minimum, if you buy a high mileage hoopty, you'll be taking out a loan for a couple of thousand dollars. If you're trying to build up bad credit scores, chances are, you're not ready for that type of commitment! When building your credit scores, it's best to start with small debts and learn how to manage them before taking on such a big responsibility.
- Get Auto Insurance - There are tons of people out there that swear that getting auto insurance and making your payments as agreed will help to improve your credit score. The truth is, I can't confirm, nor deny this because I've never watched as someone with bad credit purchased and paid for auto insurance and noted the affects of the change. However, I thought I'd mention this one so you can look around and do your own research. However, even if this will improve your score, I'd be surprised if it was an option that's anywhere near as effective as secured credit cards. The truth is, it's not a loan, on top of that, there is no revolving line of credit.
- Apply For An Unsecured Poor Credit, Credit Card - There's a reason I decided to put this option at the bottom of the list. If you take a look at the very few options out there for unsecured credit cards designed for consumers with poor credit, you'll notice more fees than anyone would care to pay. I've seen cards that charge a $370 annual fee, $35 credit card printing fee, and $40 activation fee, leading to $445 in fees before your first swipe! Not to mention these cards tend to have $500 credit limits. So, when you get your card, you've got $445 to pay back and a whopping $55 available. I understand that people apply without reading the terms, but come on people, stop falling for this crap! I've been searching for a long time and the only poor credit, unsecured credit card I found that is even remotely acceptable in my eyes is the Visa Platinum from Credit One Bank.