We are always recommending using a standard or secured credit card to help rebuild credit or qualify for a bad credit car loan, but what exactly is it and how does it help? Our auto loans team outlines exactly how secured credit cards help rebuild credit score for your next car loan.
What is a Secured Credit Card?
A secured credit card is a special type of credit card for those with low or no credit score.
If you just turned 18, just arrived in Canada or have bad credit, they are a viable way to begin building, or rebuilding credit. They aren’t the only way to rebuild but they are a relatively cheap and accessible way of doing it.
A secured credit card works just like a standard card. But, instead of having a credit limit determined by your credit score, a secured card uses a deposit.
For example, you get a secured credit card with a $1,000 credit limit. You would need to put down $1,000 in cash on the card as a deposit.
If you always pay on time and settle the card when you’re done, you get that deposit back. If you miss a payment, that payment, plus a fee, will be deducted from that deposit.
How Do Secured Credit Cards Help Rebuild Credit?
Aside from the cash deposit, secured credit cards help rebuild credit the same as standard credit cards. You can buy things with it, make minimum payments each month and (should) pay it off in full each month.
Every time you make a payment, it’s logged on your credit report and forms part of your payment history. After 6-12 months, your credit score will be in a much better place than it was when you first started using the card.
After a while, you may be able to switch from a secure credit card to a standard card and continue rebuilding credit that way.
There’s no rush though. As long as you settle the balance in full every month, the interest will be minimal.
As long as you get a card with minimal charges, it should cost you very little to manage the card. All while rebuilding your credit.
Rebuilding Credit With a Secured Card
We recommend using a secured credit card for everyday expenses like groceries, gas and whatever you usually spend your money on.
Set up an automatic payment for the minimum each month but make a cash payment to settle the balance. That way, you’re covered by the automatic payment if you forget to settle the balance and minimize interest payments because you don’t carry debt on the card.
Secured credit cards usually have higher interest rates than standard cards so this is a way of using the card without having to pay too much for it.
Then, when you can qualify for a standard credit card, you can get one, shut down this card and get your deposit back.
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!