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Using a Secured Credit Card to Build Your Credit Score? Make Sure Your Payments Are Being Reported!

Aug. 1, 2014
Credit Cards, Credit Cards for Average or Fair Credit, Credit Score
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Taking steps to rebuild your credit is always a difficult undertaking. Many people find themselves in a catch-22 situation – because they have poor credit, they can’t get credit. This makes it hard to rebuild a sullied score.

In this case, opting for a secured card is a good choice. But there’s an important step you should take before signing on the dotted line. Not sure what it is? Take a look at the details below.

How secured credit cards help build credit

People with poor credit are too risky in the eyes of most banks to qualify for a regular (unsecured) credit card. The only way lenders will agree to extend credit to these borrowers is by “securing” a card with a deposit. In most cases, customers are required to deposit the total amount of their credit line as collateral, so if you want a card with a $1,000 limit, you’ll have to deposit $1,000.

But when the card is used, the customer is tapping a line of credit (not the deposit), and monthly payments are made in the same way that they would be with an unsecured card. This is the basic reason that secured cards are preferable over prepaid debit for folks who want to boost their credit scores. Since they’re using credit with a secured card, their actions have an impact on their credit scores. Assuming the borrower is responsible, he or she will be on the way to better credit in no time.

But it’s important to be sure that your payments are being reported

A secured card can be a lifeline for people who can’t get approved for other types of credit. But there’s one important step you need to take if you’re thinking of opening a secured credit card account: verifying that the issuer is going to be reporting your information to the credit bureaus.

You might be surprised to learn that not all lenders report to all three credit bureaus – credit reporting in the United States is strictly voluntary, so no bank is compelled to send your information to Experian, TransUnion or Equifax. But it also turns out that lenders can pick and choose which types of accounts they wish to report. Unfortunately, it’s somewhat common for banks to decide not to report activity on secured credit cards.

To understand why, the Nerds reached out to Maxine Sweet, vice president of public education at Experian. She told us:

“There can be significant expense and liability associated with reporting, which means that … specialized departments within larger financial institutions may not be able to meet all the reporting and verification requirements.

“That is why we always recommend that consumers ask creditors about their reporting policies. It’s especially a good idea to ask before deciding on a secured card.”

If you’re using a secured card from an issuer that isn’t reporting, all of the on-time, in-full payments you’re making won’t show up on your credit report. This means that they won’t be reflected in your credit score, so you won’t be making any progress toward creditworthiness.

» MORE: Credit cards for bad credit

Keep up with good habits to achieve better credit

Aside from choosing a secured credit card from an issuer that’s reporting to the credit bureaus, what else can you do to achieve better credit? Take a look at the Nerds’ top tips below:

  • Pay your bills on time – Paying all of your bills by their due dates is the most powerful thing you can do to improve your credit.
  • Keep the balance on your secured card low – Don’t use more than 30% of your available credit at any time.
  • Convert to an unsecured card as soon as you can – After 3-6 months of responsibly using your secured card, call your issuer and see if you can convert to an unsecured card. This will make it easier to keep up your credit-building momentum.
  • Limit credit applications to those you actually need – Although getting more credit (in the form of an auto loan or an additional credit card, for instance) will likely help your score in the long run, don’t go crazy with applications. Too many credit inquiries will do damage to your score.

The bottom line: A secured credit card is a great option for rebuilding your credit, but only if your information is reported to the credit bureaus. Be sure to check on this before you submit your application!

Bad credit image via Shutterstock