How to use secured credit cards to establish a credit score

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How to use secured credit cards to establish a credit rating
2 years ago
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Credit rating is important these days. A very good credit score can boost your buying power tremendously; a poor rating can make things more difficult. If you have bad credit, you can hardly hold your hopes up that a bank would approve your loan application. And if you do find a lender willing to grant you a loan despite your low credit score, you will find your interest rates to be extremely high. You can expect the same thing happening with your other applications for other types of credit or services including insurance or lease wherein you may have to compete with other interested parties whose credit ratings can easily trump yours.

How to Build a Good Credit History

It pays to build a sound credit history as soon as you graduate from college. As early as possible, you should consider getting a credit card under your name and taking out small loans because that is how you can create entries for your credit records.

Here are a few tips on how to build a good credit:

- Make it a point to promptly pay all your bills. Be aware that late payments are noted in your credit record and can reduce your score.

- It is not a good idea to max out on your credit cards even if you manage to fully pay your balances each month.

- Do not exceed your credit limits.

- Generally, a longer, older credit history makes a better credit score (provided there are no adverse reports). So, it will help if you use your oldest credit cards every now and then to keep your accounts active but make sure to pay off your bills when they come.

- Review your credit report regularly from the credit report bureaus (TransUnion, Experian and Equifax) and if there are errors, dispute them immediately.

Using Secured Credit Cards to Establish a Credit Rating

The foregoing should have given you a fairly good idea on how to go about in building a favorable credit history. Now learn how to use secured credit cards to establish a good credit rating. First, you should know how secured credit cards differ from regular credit cards. The basic difference between the two is that while regular credit cards are pure credit privileges granted by the credit card company, secured credit cards are backed by your funds deposited with the issuing bank. Why are deposits required? Your deposit serves as security which the bank may use to settle your account if you fail to pay your credit card debts. The amount of deposit required is at least a hundred percent of the credit limit like a deposit of $1,000 can get you a credit card with a limit of $1,000 at most.

Another thing is that while there are regular credit cards that do not charge annual fees, banks usually collect application fees, processing fees and annual renewal fees on secured credit cards. Despite the deposit requirement and the fees involved, there are a number of people who apply for secured credit cards. They are usually those who are getting credit cards under their names for the first time and are working on building their credit history. Or, they could be individuals with low credit scores and are now in the process of repairing their credit. People deemed ineligible for regular credit card facilities have no other choice but to use secured credit cards to establish credit rating. With no risk to the bank, these secured credit cards allow individuals to build or rebuild their credit and prove that they can manage their debts properly.

by Joanne Pierce
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