Debt settlement can reduce your credit score by 100 points and that’s quite a heavy price you have to pay to get out of debt. However, when dealing with a financial challenge and an overwhelming amount of debt, people aren’t left with many options so they have to take such measures to just settle their outstanding balances.
It’s not just with debt settlement, in fact, even if you choose some other debt relief option, you’ll have to face the dip on your credit score. Fortunately, the dip isn’t permanent and you can rebuild your credit history with some strategic measures and getting a secured credit card is definitely one of them.
Understanding A Secured Credit Card
A secured credit card works just the same as any other traditional credit card. It’s just that to get a secured card, you need to submit a collateral. You can deposit a collateral in any form including your house, your car or any other valuable asset or a security deposit. What this collateral does is that it will reduce the lender’s risk which is why it’s easier to get a secured card as compared to a regular credit card.
In a secured credit card, your credit limit is equal to the amount that you deposit as security. For example, if you are depositing a security amount of $300, your credit limit will also be $300. In such a case, if you default on your payments, your cardholder will then use the deposit to cover your outstanding balance.
On the other hand, if you make timely monthly payments, your security deposit will be returned back to you when you close your account in a good standing or when you are upgraded to an unsecured card after showing positive and responsible financial behaviour.
How Does A Secured Credit Cards Improve Your Credit Score?
In order to get your credit rolling again, a secured credit card can really come in handy especially after debt settlement. All you need to do is to make timely repayments without any delays. Doing so will improve your creditworthiness and when reported to the credit bureau, your responsible financial attitude will increase your credit score.
You just need to use the card regularly and responsibly to improve your credit report. What’s best is that after a certain amount of time, not only will your score improve but you might also get an upgrade to an unsecured card with a better credit limit.
How To Use A Best Secured Credit Card To Rebuild Your Score?
If you’ve recently closed your account with a debt settlement program and your credit score has taken a hit then here are a few ways you can use your secured card to improve your report again;
1-Choosing The Right Card
One of the most important things to do is to choose the right secured card that reports to the majority of the credit bureaus as this is the only way your credit score will improve. Moreover, look for a card that comes with an upgrade to an unsecured card after a certain amount of time. Also, choose the one that comes with favorable terms, no additional fees and a minimum security deposit.
2-Using The Card Regularly
Using the card regularly is another important factor that will improve your score by leaps and bounds. Once you obtain your secured card, make small purchases with it and pay them off timely in order to increase your score. An inactive card will eventually close your account and that can have an even adverse affect on your credit report.
3-Make All Your Payments On Time
Your payment history is one of the most important factors in building your credit score. You are supposed to pay your balance in full every month and make sure that there aren’t any late or missed payments reported or else it’ll stay on your report for up to 7 years. If you can’t make full payment every month, at least make sure to pay the minimum you can to avoid any unwanted consequences.
4-Keeping A Low Balance
Just like any other traditional credit card, you should keep your balance low as compared to your credit limit. If you max out on your credit card, it will reflect a higher credit utilization ratio and that will eventually mess up your credit score. You need to use only 30% of your credit limit and only use small amounts so that it’s easier for you to pay them off.
5-Monitoring Your Credit Score
There are multiple platforms that allow you to check your credit score for free. Monitoring your score and keeping a close check on your credit card usage and its impact on your report is of utmost importance. If you ever come across an unexpected drop in your score, check for any errors and if you find one, make sure to dispute it and get it removed before any further credit damage.
Pros And Cons Of A Secured Credit Card?
If you are asking yourself, is getting a secured credit card after debt settlement a good idea? In order to get the right answer you should first weigh out its pros and cons.
Pros Of A Secured Credit Card
Easy Approval: Due to their required cash deposit, it’s easier to get a secured credit card than an unsecured one. Especially if you have no credit history or a poor credit score then it’s best to get a secured card and improve your report overall.
Building Credit: One of the main benefits of obtaining a secured credit card is that it will help you build your credit report. If you use it responsibly, you will see visible improvements in your credit history.
Helps Maintain Financial Discipline: In order to keep your financial profile in a good standing, a secured credit card can really come in handy as it comes with low balances to maintain.
Controlled Spending: You can’t overspend with a secured credit card as it has the same credit limit as your security deposit. This just helps people spend wisely without any debt accumulation.
Cons Of A Secured Credit Card
You Need To Make A Security Deposit: You need to make a cash deposit upfront in order to obtain a secured credit card. For this, you first will have to set aside some money.
Lower Credit Limits: Secured cards come with lower credit limits which can make you feel restricted especially if you have larger expenses.
Fewer Rewards: With a secured card, you don’t get as many rewards like an unsecured one. This just makes them less appealing overall as you don’t get to enjoy any bonuses or cashbacks etc.
Overall Verdict
A secured credit card comes with its own ups and downs but if you are specifically getting one to fix your credit score after a debt settlement then this surely is the right move. Debt settlement can mess up your credit report and a low score can become a huge hurdle for your financial life. A low score means no more loans, lesser job opportunities, no housing and sometimes, you can’t even get a car if your score is poor. However, with the right credit building strategies and the right usage of your secured credit card, you can fix it all without any hassle.
FAQs
Q1.How Much Score Can A Secured Credit Card Increase?
It’s really impossible to tell an exact figure of your credit score that your secured card will raise but all we know for sure is that improving the score is relatively easier and quicker when you use the card responsibly. With the best use, you can see an improvement in your score within 6 months.
Q2.What Is The Minimum Amount For A Secured Credit Card?
The minimum amount you need to deposit as security for a secured credit card is $200. The figure can go up to $5000 depending on the cardholder and the type of secured card you are looking for. When getting such a card for rebuilding your credit score, make sure to choose the one that comes with a minimum security deposit.
Q3. How Much Should I Spend On My Secured Card To Rebuild Credit?
The rule of thumb is to keep your credit utilization ratio under 30% for the best results. You need to spend as less of your credit limit as possible because if you max out on the limit, it can further damage your credit score and no lender will be comfortable giving you a loan again. For example, if your credit limit is $200, you need to make sure that you just spend $60 out of it.
If you are looking for a reliable and professional debt relief company that can help you get out of debt-poor credit score situations then try Mountains Debt Relief for the best services ever.