Laura answers a listener's question about what type of credit card to use to rebuild credit the fastest way possible.
Laura answers a listener's question about what type of credit card to use to rebuild credit the fastest way possible.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Mercy, who says:
"'I'm trying to rebuild my credit and recently completed your Build Better Credit online course. If my credit card is locked, I wonder if I should pay a small fee to unlock it or get a secured credit card. Or should I do both and stay below a 20% credit utilization to build my credit scores the fastest?"
Thanks for your question and being a Build Better Credit student, Mercy! There are legitimate strategies for boosting your credit scores quickly. This post will answer Mercy's question and review which card type builds credit the fastest.
Thanks for downloading episode 909 of the Money Girl podcast! I'm Laura Adams, an award-winning author, money speaker, on-camera spokesperson, and founder of The Money Stack, a free Substack newsletter.
You can learn more and connect with me at LauraDAdams.com. That's also where you can email your money question, learn more about my books and courses, and sign up for The Money Stack. You can also record a brief question or comment on our voicemail line at 302-364-0308.
LISTEN ALSO: 6 ways using credit cards can build excellent credit
Which credit card builds credit the fastest?
If you've been following Money Girl, you already know the benefits of building and maintaining good credit. The higher your credit scores, the less you pay for debt, like credit cards, car loans, and mortgages. In addition, poor credit means you pay more for security deposits on various utility accounts and specific insurance and could get turned down by a prospective employer or landlord.
So, I'm glad Mercy is prioritizing her credit. She didn't mention why there's a lock on her credit card. It's a security feature that temporarily prevents new transactions on your card, so unauthorized charges are blocked. Mercy could have frozen it after being the victim of identity theft or to help stick to a budget.
The only way to build credit is by having credit accounts in your name and using them responsibly. If Mercy unlocks her frozen card, it can be a terrific tool to boost her scores quickly.
A good strategy is to make occasional purchases that you pay off in full monthly. Timely payments help you build a history of positive transactions. Remember that you never have to carry debt or pay interest on a credit card to build excellent credit.
However, as Mercy mentioned, limiting your credit utilization, or balance compared to your card's credit limit, to 20% is wise for optimal credit. It indicates that you're not using too much credit or in danger of missing a payment.
But if Mercy locked her card to prevent impulse spending, she must be realistic about the potential downside. If she's regularly tempted to overspend on a card, it could hurt her finances instead of helping them. In that case, using a secured card could be a better option we'll cover next.
RELATED: How to get credit with no or bad credit
What is a secured credit card?
A secured credit card is similar to a regular, unsecured card because they:
The primary difference is that once approved, you must pay a refundable deposit to use a secured credit card. Some don't check your credit but automatically give you a credit limit based on your deposit.
A secured card issuer holds your deposit as collateral if you don't make a minimum monthly payment. If there's an annual fee, it may be taken out of your deposit. The balance gets returned if you close the account or transition to one of the issuer's unsecured cards.
The minimum required deposit on a secured card depends on the issuer. Some may only need $50, but others may require several hundred. Sometimes, you can pay a deposit in installments over a period, such as 90 days, before your card is issued.
For instance, if your deposit is $300 on a secured card, your monthly charges can never exceed that amount. So, if you plan to use it for larger purchases, you need to make a bigger deposit. If you want to increase your initial credit line, most secured cards allow you to make at least one additional deposit. The maximum amount varies but may range from $3,000 to $5,000.
READ ALSO: How to minimize credit damage after a late payment
How does a secured credit card build credit?
Even though you spend your own money using a secured credit card, some, but not all, of them report your payment information to the nationwide credit bureaus. Therefore, if your goal is to build credit, only apply for the best secured cards that send data to one or more credit agencies, such as Experian, Equifax, or TransUnion. A history of making timely payments, even just minimum payments, is powerful for building credit.
As I mentioned, credit utilization is another important factor in your credit score calculation. The guideline to stay below 20% also applies to secured cards. Therefore, with a $300 limit, you could only charge $60 ($300 x 0.2 = $60) per monthly billing cycle. Again, pay a higher card deposit if you want to charge more.
The lower your credit utilization, the better, especially when building or rebuilding your credit. If you used a secured card strategically by making timely payments and keeping a low utilization, you could see a significant increase in your credit scores in approximately six months. That could be a lifeline back to good credit after mismanaging credit or experiencing financial hardship.
You can search for secured cards online and compare offers. Remember that if you pay off a card balance in full each month, its interest rate isn't as important as other benefits, such as no annual fees and reporting to the credit bureaus.
If you can't get approved for a secured card that reports credit date, look for an issuer that converts secured accounts to regular cards after you demonstrate responsible use after a period, such as six or twelve months.
A secured card is like riding a bike with training wheels–a great way to start, but typically not the best long-term solution. If you're a responsible cardholder, aim to get a regular, unsecured card as quickly as possible. It gives you the most benefits and allows you to build the most substantial credit history.
RELATED: How to pay off credit card debt faster
Before we go, here's a quick reminder to subscribe to The Money Stack, my Substack newsletter, when you visit LauraDAdams.com. It's filled with money tips, tools, news, challenges, and things I enjoy! You can subscribe for free or become a paid member with access to live educational events like my upcoming Smart Investing Masterclass called Overcome Your Fears & Procrastination and Start Building Wealth.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Brannan Goetschius is our director of podcasts, Holly Hutchings is our digital operations specialist, Morgan Christianson is our advertising operations specialist, Davina Tomlin is our marketing and publicity associate, and Nathaniel Hoopes is our marketing contractor.