Build Your Credit History - How to Build Credit History from Scratch

Your credit score is central to getting loans and credit cards. Need an emergency loan? Well, you need to have a high enough credit score. Want a credit card? You need that too. In fact, not having a high enough Credit Score and applying for loans will only damage whatever score you already have.

But how can you get loans and credit cards if you don’t have a Credit Score to speak of, or when the score is quite low? In this article, we are going to show you how you can increase the score. But understand that this is not magic. Your score won’t reach new heights overnight. It’s going to take time, but if you show sustained effort, you’ll get there!

Get a low-limit card from your bank

This is one of the best ways to build up your credit score. Get a low limit card from the bank where you already have an account. They will be most likely to give this to you when you are starting out. Now, since the card has a low limit, you are not borrowing much, and thus you won’t have much trouble in repaying the card. This easily builds up your credit score.

That being said, it is also important to use the card responsibly to start with. Don’t use it to buy anything you come across. Don’t use it to buy high-priced items which you know you’ll find it hard to repay. Pay off your bills and dues and always remain under 30% of the credit utilization ratio. Keep doing all this for 6 months and you’ll see your credit score increasing.

Get a secured card or a secured loan

To get a secured card, you place a monetary deposit with the bank as security. When taking a secured loan, you give a more physical security like property. In both cases, you are more likely to get these lines of credit since these are of less risk to the lender. When such loans are approved for you, always pay the EMIs on time, and even before the time if you can manage it. All of your actions shall be reported to the Credit Bureaus, who in turn shall determine your Credit Score.

Buy something in installments

Wanted to buy that luxury item? Well, go ahead. Buy it with a loan, and then start repaying it back on time. But make sure it is something you won’t have any problem in repaying at all.

Now that you are seeing your Credit Score increase, it is important to maintain it. To ensure that you do this, make sure that you:

1. Don’t delay payments and EMIs
2. Don’t ignore bills
3. Don’t reach your credit utilization limit

Rebuild Credit Score with Secured Credit Cards - Repair Credit Report

Secured credit cards are quite popular and highly sought after. However, there are a few limitations to them too. In this blog, you’ll learn how to rebuild your credit score with a secured credit card, how to convert to an unsecured credit card, and much more.

What is a Secured Credit Card?

It is a type of credit card designed for individuals who are looking to build credit. However, it is often used as a result of lack of access to regular (unsecured) credit cards, as they haven't yet established enough credit score. It could be a supportive start for someone without any credit history or for someone trying to rebuild their damaged credit history. It is known as a "secured" card because it is secured by some money that you have to deposit against the card's credit limit. A secured credit card can safely hold your hand and guide you to a prosperous credit history.

Secured Credit Cards Vs. Regular Credit Cards

The only difference between the two is that a secured credit card is sanctioned against security (cash) deposit, which unsecured credit cards don't require. Secured cards often have higher fees than unsecured ones. You might have to pay an application fee and yearly subscription fees as well. The penalty APR could be quite high for these cards.

If you are wondering why, the answer is quite simple: a person who isn't creditworthy, is unreliable with credit. Hence lenders impose high interest rates on them. Apart from these aspects, secured credit cards are just like regular unsecured credit cards and function on similar terms.
How Do Secured Cards Work?

If you are looking for a chance to build or rebuild your credit, a secured credit card could be a suitable option for you. You just need to approach the bank and apply for a secured credit card. You should know that there isn't a guarantee of getting a secured card just by paying a deposit. Your documents will be scrutinized, and the application will be approved only when you meet the requirements of the issuer.

Once your application for a secured card is approved, you must pay the security deposit to get the card. The issuer sets a credit limit for you, which is secured with the cash deposit. After you make the initial deposit, secured cards work precisely like the unsecured ones. You can use the card wherever credit cards are accepted. As you make purchases, your credit utilization rate rises.

The card issuers report your monthly activities to credit bureaus - your credit score fluctuates accordingly. You must not assume that you don't have to pay monthly credit card bills since you have already paid a deposit. The deposit is for security reasons so that lenders don't run at a loss if you ever fail to repay your dues. Just like regular credit cards, you have to repay your credit card bill every month within the due date. If not, an APR is imposed on your outstanding balance.

You can use these cards judiciously to repair your credit report. In general, you should be careful with the way you are using your secured credit cards. You should always ensure a clean record of positive activities to improve your credit health. Use the card responsibly and pay your balance on time. In this way, you can build or rebuild your credit using the card. What more? You can gain and redeem reward points as well!

What are the drawbacks of a Secured Credit Card?

Secured credit cards seem to be the ideal solution to all your problems. But wait, is it?

Let's take look at the disadvantages of using a secured credit card.

1. There is a greater likelihood of higher interest rates.
2. Secured credit card fees are between $30 to $50.
3. It gives you a low spending limit.
4. The security deposit shall not be accessed until the account is closed.
   

How can Secured Credit Cards Improve Your Credit Score?

Secured Credit Cards help improve your credit score to a large extent. Listed below are the scenarios in which your credit score could benefit from a secured card.

1. New Users: You must be aware of the fact that a credit card is the best way to build credit; a good credit history gives you access to better credit facilities. However, if you are new to the financial world, you might not have a good enough credit score to qualify for regular credit cards. A person with a low credit score is not creditworthy in the eyes of potential lenders. Secured credit cards come of use in such a scenario. It is easier to qualify for a secured card than the unsecured ones, because you are paying a security deposit to the lender - in case you fail to repay, the lenders have a fall-back option and won't incur a loss. If you make payments on time and maintain a perfect credit utilization ratio, your credit scores will increase for sure. Once you have successfully earned enough credit score, upgrade to a regular credit card, and follow mymoneykarma’s tips to use it efficiently.
2. Rebuilding Credit: Your credit could take a severe blow due to many reasons - missed or delayed payments, delinquency, accounts in collections, repossession, foreclosure, etc. In such a scenario, your credit history would be spoilt, and you might have to rebuild it from scratch. A low credit score doesn't let you take new credit cards. How would you rebuild your credit then? Secured credit cards could be the perfect solution. It is easier to qualify for a secured credit card than the unsecured ones. If you get approval for a secured card, you could maintain a spotless credit history of low usage and timely payments to improve your credit score significantly. If your application is rejected, get help from mymoneykarma and learn. how to re-apply. Keep track of your credit score at mymoneykarma as well.
3. Improving Credit: Secured cards can come to use even though you already have good credit with endless opportunities for new unsecured cards. Let's assume that you have reached the maximum credit limit that you are entitled to, yet you wish to increase your credit limit by another Rs.2,00,000. Unsecured credit cards might not help you here as your request won't be approved, but secured ones definitely will. You could make a security deposit of Rs.2,00,000 and reap the benefits of a bigger credit limit.

How Do I Convert to an Unsecured Credit Card?

If you maintain a steady and clean credit history, your secured card can be considered for an upgrade. Most issuers have their terms and conditions which you need to qualify to upgrade. If you maintain a history of timely payments and low credit balance, you are more likely to get an upgrade soon.

A few secured credit card issuers review your account after a year of usage and upgrade you to a regular card if you meet the requirements. For some cards, you might have to apply for an upgrade. Once you have reached the target credit score and successfully improved your credit history, you can apply for a new unsecured credit card with another credit card issuer.