How Can a Secured Credit Card Build Your Credit Score?

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Whether you are trying to establish credit or clean up a dirty credit history, you've probably considered the option of applying for a secured credit card. A secured credit card requires you to open and maintain a savings account as security for your line of credit --and all payments made are reported to the major consumer reporting agencies.

Today's blog is in response to a number of recent questions from people interested in using a secured credit card to boost their credit score --or establish a positive credit history from scratch.     

How Can a Secured Credit Card Build Your Credit Score?
This guest post was written by Jason Bushey. Jason is a full-time personal finance blogger who specializes in advising on and reviewing credit cards for bad credit.

One of the most common questions surrounding credit is, "How can I build my credit score from scratch?" Getting that first credit card can feel akin to finding your first job; how do you get your first one when everybody requires experience?

It can definitely feel like a chicken-and-egg situation, but luckily for consumers there is one type of credit card targeted specifically at those trying to build or rebuild their credit scores: secured credit cards.

Secured credit cards differ slightly from traditional credit cards in that they require a security deposit up front. That deposit is fully refundable and guarantees the line of credit extended to you by a creditor or financier. On average, a consumer's credit line will be between 60 and 70 percent of the total deposit put down. This protects the financial institution extending the line of credit from the consumer, and perhaps more importantly the consumer from themselves.

These cards differ from prepaid or debit cards because they extend you a line of credit, report your usage to the major credit bureaus and can help you build or rebuild your credit score; the same cannot be said for prepaid cards, which cannot directly improve your credit score in any way.

Secured cards are particularly useful for credit newbies or consumers with damaged credit because their approval rates are high, their interest rates low and the risk of falling into debt minimal.

There's really no better way to build or rebuild your score than with responsible use of a secured card. Here's why:

1.)    Secured cards improve your payment history

Your payment history - good or bad - makes up over a third of your credit score according to FICO. Paying your credit card bill on time every month is the easiest way to build or rebuild your score and credit profile.

2.)    Secured cards improve your credit utilization ratio

Your credit utilization ratio is the amount of credit you owe (your balance) in relation to the amount of total credit available to you. Opening a new line of credit will improve this ratio, albeit modestly. From there, it's up to you to keep that ratio low. This means paying your bill in full (or close to it) each month and every month.

3.)    Improves your credit account profile

The final way in which opening a secured credit card will boost your score is by diversifying your credit profile. Believe it or not, 10 percent of your credit score is made up by new accounts.

Initially, you may actually see a small drop in your credit score after receiving your new card. This is due to what is called a "hard pull" of your credit score, which is retrieved by the credit card company when determining whether or not to approve you for a credit card.

However, the misconception surrounding credit score pulls is that when a consumer pulls their own score - via a credit report or credit monitoring service - this will hurt their score, too. That's actually not the case, since a self-pull of one's credit is considered a "soft pull" and this does not affect your credit score in any way, positive or negative.

So now that you're familiar with secured credit cards...
The next thing to do is determine which secured credit card is best for you. The Capital One® Secured MasterCard® combines a household name with one of the best secured options on the market today; this card includes credit monitoring tools that are especially useful for credit newbies interested in understanding their score. The security deposit required with this card can be as little as $49, and responsible use of this card for 12 months or more can lead to an unsecured offer from Capital One.

Another excellent series of secured credit cards available are those issued by First Progress. These cards carry low interest rates and modest annual fees, and like the aforementioned Capital One card they report to the three major credit bureaus - Experian, Equifax and TransUnion.

No matter what secured card you determine is best for you, the most important thing to remember is to pay your bill on time each and every month. Keep your debt low and you'll be on your way towards building or rebuilding your credit score.

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