Secured credit cards

How effective are secured cards at helping consumers build their credit?

They are quite effective. In most cases, for clients with limited or no credit history at all, it is a great option to build their FICO score. In particular, secured credit cards are popular among recent immigrants. The advantage of a secured credit card is exactly the fact that it helps you to create a positive credit history. The disadvantage is cost. Those cards tend to be expensive, and many carry annual fees and high-interest rates.

What should a consumer do for their credit if they get denied a secured card?

If the goal of initially applying for a secured credit is to obtain credit (i.e. borrow money), then a consumer should apply for credit elsewhere (other credit cards, store cards, banks, etc.). However, if the consumer’s goal is to improve her/his credit, then I believe a mental shift is necessary. A person denied a secured card likely has a bad credit history, which is often caused by making late payments or missing payments completely. Dedicating oneself to paying bills on time – always and forever – might be the best way to improve credit enough to obtain a loan in the future.

When is a secured credit card a good idea?
A secured credit card is a good option when one doesn’t have a good enough credit history to qualify for a regular credit card. You have to make an initial collateral deposit which serves as your credit line, and still have to pay it off every month to avoid getting charged interest and or late fees. It is important to look at the terms and conditions of the card to make sure they don’t charge egregious fees. There are many competitive secured credit card offers so you should shop around to get the best deal. An alternative is to just use a debit card attached to your checking account, though that would not help you build your credit score.

Can secured credit cards really help consumers raise their credit?
It could be assumed that a likely correlation exists between secured credit card usage and improved creditworthiness; however, to assert such with a conviction would be tenuous because other factors also play a role.

The main thing however is that people new to credit or attempting to repair bad credit should consider using secured credit cards. While solely relying on such a card may not be the optimum tactic, this could be a move in the right direction to help consumers improve or raise their credit.

Can spending more money help consumers build their credit score faster?
If a borrower hopes to increase their credit score quickly it is generally not advisable to spend more money fast by using a credit card. Financial institutions monitor ratios including total balance outstanding divided by the total credit available. If this percent indebtedness grows too quickly a financial institution may flag the account and accelerate risk management. Lenders do not like uncertainty and are more comfortable with predictable behavior. One best practice for increasing a credit score quickly is to become more predictable by spending around 25% of a credit limit monthly and then paying off the balance in full at the end of every billing cycle. This demonstrates a history of on-time payments, credit avoids interest costs, and provides historical behaviors can increase a credit score and give confidence to future lenders.

How do secured credit cards help consumers build their credit score?
The key is access to credit. People with new or damaged credit scores struggle to get approved for some favorable credit products, which prevents them from building or rehabilitating their credit score. The main reason why they get denied is the high risk of default creditors sense. By securing their credit cards, this risk disappears or diminishes and the consumer now has an opportunity to have credit and build it through time with a positive and consistent track record. I would recommend consumers that have limited access to credit to cautiously consider this type of options.