Can a Secured Credit Card Improve My Credit Score Rating?

Reader question: "I am trying to improve my credit score rating so that I can buy a house early next year. I don't currently have any cards because of my past history, but somebody told me I could use a secured credit card to improve my score. Is this true? And if so, how should I use the secured card in order to improve my rating?"

I don't advocate using credit cards just for scoring purposes. But if you need one for other reasons, it's certainly nice to know it can improve your credit score (sort of a bonus). Of course, you have to use it the right way for this to happen.

So yes, using a secured card can certainly improve your credit score rating over time. In fact, using any form of credit can improve your score -- if you do it responsibly. I'll get into what "responsible" means in just a moment, but first I would like to explain what a secured credit card is. Some readers may not be familiar with this term, so let's define it.

The Secured Credit Card - Explained

Basically, these are cards that are secured by a cash deposit that is paid up front. As you're probably already aware, a regular credit card does not require you to put down any kind of deposit. You simply apply for the card, and if you have a decent credit history you'll probably get approved. In fact, half the time you get pre-approved in advance, which is why we get so much advertising mail to that effect.

But a secured credit card is different. In order to get one of these cards, you must put down some kind of deposit up front. On average, the deposit will range from $500 - $1,000. After making that initial payment, you would have a credit line open, and you would be able to charge a certain percentage of the deposited amount.

Here's a good example:
Get a Classic Black Secured Visa Now


At this point, you might be asking why somebody would do this. After all, it seems like you are just reducing the amount of money you have at your disposal. If you put down a certain amount of money in advance to get a secured credit card, and they only allow you to charge a certain percentage of that deposited amount, you're essentially giving money away. Right? Well, this brings us up to the question you've asked.

People who use these cards do so because they cannot qualify for a regular credit card, usually because they have some kind of financial catastrophe in their recent past. For example, someone who has just declared bankruptcy will probably be turned down for a credit card application.

This puts the person between a rock and a hard place. On one hand, people know that using a credit card wisely can help improve a credit score rating. But you can't even get a card when you've just filed bankruptcy (or suffered some other financial calamity). It's almost as if you're stuck. So what do you do?

This is the kind of scenario where a lot of people use secured credit cards to improve their credit score rating -- because it's the only type of card they can get in their current financial situation. They simply have no other choice, other than paying cash for everything (which is not a bad idea actually).

As with everything else in the financial industry, there are certain warnings you should keep in mind. If you have decided to use a secured credit card to try and improve your credit score, you need to do thorough research into the company you are using. In other words, you need to look before you leap.

A lot of companies make offers that sound too good to be true, and in most cases they are. They make bold claims about how you'll be able to achieve an excellent credit rating by using their secure cards, but nobody can promise such a thing. Yes, this is a viable strategy for boosting your credit score, but you need to use common sense and research to protect yourself.

How to Improve Your Credit Score by Using One

Here are the steps I would recommend if you're going to use a secured credit card to improve your credit score rating.

1. Choose a secured card from a reputable company.

It's amazing what you can learn about a bank or financial company just by using the Internet. And that's exactly what you should do before you apply for a secured credit card from such a company.

First, go to the Better Business Bureau website and do a search for the company's name do they have a lot of complaints filed against them? The order they have a pretty clean customer service record?

Next, you should do a general Internet search for the company's name using Google or some other major search engine. You can also search the FTC website to see if any complaints filed against that credit card company.

A reputable company worth considering:
Get a Classic Black Secured Visa Now


2. Find out about monthly fees and other charges.

Secured credit cards come in a wide variety of "shapes and sizes." Some of them can be a good value, while others simply take advantage of consumers by charging outrageous fees. It's like everything else in the financial industry -- there are some good ones and some bad ones, and lots of things in between.

With a bit of homework, however, you can find companies who offer secured credit cards without all of those fees. This is the kind of card you want to use to improve your credit score rating, because it won't add to your existing debt.

3. Use your card wisely and sparingly.

The best way to use a secured credit card to improve your score rating is to make small charges on a regular basis, and then to pay the balance down each month. The last thing you want to do is accumulate a huge balance on your card. This defeats the whole purpose. Remember, you're trying to use your secured credit card in such a way that improves your credit score rating, and this means you must maintain a low balance.

Within the financial industry, this is referred to as your "utilization ratio." If you're using a high percentage of your available credit limit, then you have a high utilization ratio. This can actually lower your credit score, which is the exact opposite of what you're trying to do. By making small purchases from time to time, and by paying your balance down each month, you'll have a much better chance of improving your credit score rating over time.

4. Pay all of your other bills on time.

Your payment history accounts for approximately 35% of your overall credit score. So it has the potential to make or break your score, depending on your own actions. In addition to paying your secured credit card balance on a timely basis, you must pay all of your other bills on time as well. This is the key to building -- or rebuilding -- a solid credit history.

5. Try to pay down your existing debts.

The amount of money you currently owe on your various debts has a direct influence on your credit score. If you are nearly maxed out on one or more credit cards, it's going to have a negative impact. So, at the same time you are using your secured credit card to improve your score rating, you should be making every effort to pay down your existing debts. Start with the debts that have the highest interest type them, such as any high-interest cards you've used in the past. This is a sound strategy for getting your finances under control in general, and also for improving your credit over time.

Those are the steps I recommend you take when using a secured credit card to improve your credit score. Remember, there are other ways to boost your score, so you need to keep the big picture in mind. A secured card can also be a sound strategy to achieve this goal, if it's done properly. Use the card sparingly and wisely, and practice good financial habits in general.