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Building Credit with Secured Credit Cards and More

At O1ne Mortgage, we understand the importance of building a strong credit history. Whether you’re new to credit or looking to improve your score, secured credit cards can be a valuable tool. In this article, we’ll explore how secured credit cards work, how to use them effectively, and other strategies to build your credit. For personalized mortgage services, call us at 213-732-3074.

What Is a Secured Credit Card?

A secured credit card functions similarly to a traditional credit card, but it requires a security deposit as collateral. This deposit reduces the risk for the card issuer, making it easier for individuals with limited or poor credit history to qualify. Typically, your credit limit is equal to the amount of your deposit. For example, a $200 deposit would give you a $200 credit limit.

If you default on payments, the issuer can use your deposit to cover the outstanding balance. However, if you make timely payments, your deposit will be returned when you close the account in good standing or upgrade to an unsecured card.

How to Use a Secured Credit Card to Build Credit

Using a secured credit card responsibly can help you build or improve your credit score. Here are some key steps to follow:

1. Choose the Right Card

Select a secured credit card that reports to the major credit bureaus (Experian, TransUnion, and Equifax). Look for cards with favorable terms, such as no fees and a low minimum deposit. A card that offers the option to upgrade to an unsecured card is also beneficial.

2. Use the Card Regularly

Simply having a secured credit card isn’t enough; you need to use it actively. Make small purchases regularly and pay them off. An inactive card may be closed, which could negatively impact your credit.

3. Keep a Low Balance

Avoid maxing out your credit card. High balances can hurt your credit score due to a high credit utilization rate. Aim to keep your balance below 30% of your credit limit, but the lower, the better.

4. Make All Payments on Time

On-time payments are crucial for building credit. Payment history is the most significant factor in your credit score. Ideally, pay your balance in full each month. If that’s not possible, make at least the minimum payment by the due date.

5. Monitor Your Credit Score

Regularly check your credit score to track your progress. An unexpected drop could indicate an error on your credit report, which you should address immediately.

How Much Will a Secured Card Help Your Credit?

The impact of a secured credit card on your credit score depends on your overall credit history. However, responsible use can help improve your score over time. Here are the five primary credit scoring factors and how a secured card can help:

• Payment history: Establish a track record of on-time payments.
• Amount of debt: Maintain a low balance to keep a healthy credit utilization ratio.
• Credit age: Keep your secured card open longer to show more experience with credit.
• Credit mix: Diversify your credit types by adding other forms of credit.
• New credit: Opening a secured card may cause a short-term dip in your score, but it can recover as the inquiry ages.

More Ways to Build Credit

In addition to using a secured credit card, consider these strategies to build your credit:

Become an Authorized User

Ask a family member or friend to add you to one of their credit cards with a long, positive history. As an authorized user, you can benefit from the account’s history without being responsible for payments.

Use a Credit-Builder Loan

A credit-builder loan works in reverse to a typical loan: The loan amount is deposited into a bank account while you make monthly payments. These payments are reported to the credit bureaus, helping you build credit. At the end of the term, the loan amount, possibly plus interest, is yours to keep.

Ask for a Cosigner

If you need to borrow money, ask a trusted family member with good credit to cosign a loan. This can help you build credit, but remember that any late payments will affect their credit report as well.

Get a Boost from Regular Bills

Use a service like Experian Boost® to add timely payments for utilities, rent, insurance, and streaming services to your credit report. This can be especially helpful if you have a thin credit file.

Don’t Close Old Accounts

Older accounts help boost your credit age, showing more experience with credit. Keep these accounts open and use them periodically to keep them active.

The Bottom Line

A secured credit card is an excellent option if you’ve had trouble getting approved for a traditional credit card. Many of the best secured credit cards have a low security deposit, making it easy to get started. As you use your credit card, monitor your credit score to see the improvements from your responsible credit use.

For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to speak with one of our expert loan salespersons. We’re committed to helping you achieve your financial goals.

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