Americans currently owe an average of $16,000 per household in credit card debt. Or, if you look at it on a national scale that equates to US$1 trillion in debt. This enormous figure represents 20% of the total national debt, a situation which has worsened dramatically since the financial crisis of 2008.
Credit card debt is often the primary cause of bankruptcy cases, overshadowed only by mortgage debt. Secured credit cards can be used to rebuild your credit score, which is especially useful if you’ve just come out of the bankruptcy process.
What is a secured credit card?
These are credit cards with a fixed spending limit which is backed up by a set amount of cash you’ve deposited with your bank. So, if you’re given a secured credit card with a $250 spending limit you’ll be expected to deposit $250 in your bank account. You can never spend more than the $250 limit, which helps eliminate uncontrolled spending habits, and you also can’t use the deposited $250 to repay your credit card spending. Why? Because it protects the lender if you prove yourself incapable of managing your new credit card.
So, how do you actually use a secured credit card to rebuild your FICO score?
Does It Count?
Not every secured credit card company will report back to credit bureaus such as Equifax or Experian. The card you choose must provide these credit bureaus with information on your spending, or you have no hope of improving your credit score. Basically you need to shop around and find a card that suits your purpose, and not just the first company that signs you up.
Pay On Time
Make sure you’re seen to make your repayments on time, and in full, every single month. The easiest way to manage this is to set up automatic payments on your account. Making regular and timely payments on a line of credit is one of the single best ways to improve or establish your credit score.
Limit Your Spending
Just because you have a $250 limit on your new card that doesn’t mean you should go out and blow it all. Credit score agencies pay attention to not just how much you\’ve spent, but also what you’ve spent it on. If you have a lousy FICO score right now, and you\’re then seen to use your secured card for online gambling, then your credit score will never improve in any meaningful way.
Watch Your Score
Sign up for a credit reporting service so you can watch your credit score improve. If you’re being sensible and your FICO score remains stagnant then it’s time to reevaluate your approach, possibly choosing another type of secured credit card instead of the one you currently own.
Single Card
It’s tempting to sign up for multiple secured credit cards at the same time, the assumption being that you can improve your credit score more quickly by repaying multiple debts at the same time. The problem is that this doesn’t work, plus you run the risk of getting carried away and creating another debt bubble you lose control of.