Using a Secured Credit Card to Build Credit

Using a Secured Credit Card to Build CreditUsing a Secured Credit Card to Build CreditTo get the best terms when purchasing a car or house, applying for a personal loan, or buying a new phone your credit score comes into play. Together with your credit report, your score tells the seller/lender your creditworthiness. Credit rating is based on your previous debt and how you managed it.

If you have a good and long credit history, you get favorable credit terms. On the other hand, without any credit to show or a report riddled with late payments and overdue debts, you’ll attract undesirable terms or not get approved at all.

So, how do you fix bad credit? One of the ingenious ways is using a secured credit card as explained below.

What Is a Secured Credit Card?

A secured credit card is just one of the broad categories of credit cards. The distinction is that, unlike traditional credit cards whose repayment is not guaranteed, the risk of defaulting on a secured card is reduced through a cash deposit.

The limit is equal to the deposit, meaning that the issuer assumes a very small risk. Additionally, the security makes it unnecessary for the issuer to ask for a credit report or attach a cap on credit scores when applying for a secured credit card.

How Much Is the Security Deposit for a Secured Credit Card?

Typically, the card requires the holder to deposit $200 to $300. However, some cards attract a deposit of just $49. The upper limit is around $2500 or more depending on the issuer and previous use of the card. What is important is to remember that the credit line is equivalent to the amount of money you put into the card.

Tips for Building Credit Using a Secured Credit Card

For the card to make a difference in your credit scores, you need to know how to use it wisely. The factors that go into credit rating calculations include; payment history, outstanding debt, new credit, credit mix, and the length of credit history. With this in mind, here is how to use a secured credit card like a pro:

1.   Choose Your Card Wisely

Apart from the security deposit, you need to consider how much interest a credit card charges. The APR for secured cards is normally high and constant. It ranges around $24% or more which is in contrast to traditional credit cards that have an APR range of around 13.99% and 24.99%.

Another factor when choosing a card is the reward terms. Such include:

  • Zero charges on international transfers
  • Cash backs on restaurant and gas station payments
  • Zero annual fees

2.   Use the Card

Basically, once you deposit the security, the issuer expects you to start using the card. Wise usage calls for not maxing out your limit. You also need to keep a low card utilization; the percentage of the credit you are using is against your limit. The ideal credit utilization for building credit is 30% and below.

3.   Make Timely Payments

The whole point of getting a secured credit card is to create a stellar credit history. As such, you have to make timely payments on the card to avoid penalties that lower your credibility. Why? As a factor in credit score calculations, payment history weighs the most at 35% of the total score.

4.   Graduate to a Traditional Credit Card

If you use the card diligently, then after a year or thereabouts, your credit score will get a much-needed boost. It follows that you’ll stand a chance of qualifying for better terms on other credit lines. At such a time, and considering that you’ll have learned to use credit wisely, apply for an unsecured credit card. Also, keep in mind that the APR for secured cards is high and could be unattainable for years on end.

The Takeaway

Secured credit cards are a godsend to individuals with no or low credit scores. It is easy to apply and get approved for the card and with the right usage; you’ll see your scores improve in 6 months or so. That said, the card comes with a high-interest rate and you must pay the deposit before the credit becomes accessible.

Source: creditabsolute.com

Guarantor vs Cosigner: What Are the Differences?

Both guarantors and cosigners add their signature along with yours on a loan application or lease in order to strengthen your odds of approval.

But even though these two roles are similar, they’re not exactly the same. And understanding the difference is vital when it comes time to decide which one you need.

Here’s what you need to know.

Is a Guarantor the Same Thing as a Cosigner?

The short answer: No.

Guarantors and cosigners fulfill similar roles: They make it possible for a primary applicant to be approved for various types of personal loans and other financial products by lending their credit reputation and financial obligation to the application.

But when it comes to the scope of that financial obligation — and the rights they have to the loaned asset — things start to diverge.

What Is a Guarantor?

A loan guarantor is someone who vouches for the primary loan applicant, pledging their legal obligation to repay the loan if the primary borrower fails to repay the loan.

In other words, a guarantor is like a back-up plan for the lender — and as such, those lenders might offer guarantor loans to applicants who wouldn’t qualify on their own.

The guarantor is not responsible for repaying the debt unless and until the primary borrower fails to make their payments and the loan is at risk of being in default.

Additionally, guarantors don’t have any legal right to the loaned money, anything purchased with the loan proceeds, or to live in the dwelling if they’re acting as a guarantor on a lease.

What Is a Cosigner?

A cosigner also pledges their financial responsibility in the event the primary borrower fails to make payments — but that liability begins right away, as opposed to beginning once the primary applicant is at risk of defaulting. For example, many parents act as cosigners on their children’s student loans, since young people tend not to have long and robust credit histories.

Cosigners are also different from co-borrowers in that they don’t have any claim on the loaned asset. For example, if someone cosigns an auto loan for you, they might not have an automatic right to drive the car — whereas if you and your partner apply as co-borrowers, you’d both eventually be listed as owners on the vehicle’s title, once the loan is paid off.

Recommended: Getting a Personal Loan with a Co-Applicant

Guarantor vs Cosigner: The Differences

The main difference between a guarantor and a cosigner is the level of legal liability for the debt or borrowed asset.

A cosigner is responsible for repayment of the debt as soon as the agreement is final and can request to have loan statements sent to them so they’ll know right away if any payments have been missed.

A guarantor is only responsible for repayment of the debt if the loan is in danger of being in default and will only be notified at that point.

Financially, there are also some important differences:

•   The primary borrower and the cosigner share equal financial responsibility from the beginning, which means if either party doesn’t make payments according to the loan agreement, both of their credit scores could be negatively affected.

•   A guarantor isn’t expected to make payments unless the primary borrower is at risk of defaulting on the loan. If that does happen, it could make it more difficult for the guarantor to obtain credit in the future. If the guarantor cannot make payments on the loan, the credit of both parties can be adversely affected.

Cosigner Guarantor
Legally responsible for repaying the loan or borrowed asset immediately. Legally responsible for repaying the loan or borrowed asset if the primary borrower is at risk of defaulting.
Can request regular statements so they’re aware of any missed payments immediately. Are only notified when the primary borrower is at risk of defaulting.

Recommended: How to Get Approved for a Personal Loan

Guarantor vs Cosigner: The Similarities

Guarantors and cosigners are more alike than they are different. At a glance:

Cosigner Guarantor
Pledges their financial responsibility for the debt to strengthen the primary borrower’s application. Pledges their financial responsibility for the debt to strengthen the primary borrower’s application.
May not have any right to the loaned money or asset (exception: the cosigner on a lease, who may be entitled to live on-site). May not have any right to the loaned money or asset.

Personal Guarantor vs Cosigner: Pros and Cons

As the primary borrower, when deciding between a guarantor and cosigner, the choice may come down to which kinds of loans are available (guarantor loans can be harder to find than loans allowing a cosigner) and what kind of agreement you’re entering into. If you’re signing a lease with a roommate, that person should be a cosigner rather than a guarantor.

Pros of Guarantors Cons of Guarantors Pros of cosigners Cons of cosigners
Can help strengthen your application. It can be stressful if you default and force your guarantor into the position of repayment. Can help strengthen your application. Having to ask someone to cosign for you can be intimidating.
Guarantors are only responsible if you default — their actions don’t have an impact on your finances unless they also fail to repay the debt. If signing a lease, guarantors generally aren’t allowed to live on-site. If signing a lease, a cosigner can be your roommate. If your cosigner fails to pay, that can impact your credit history, too.

Do Guarantors Get Credit Checked?

Yes — as part of the application process, both you and your guarantor (or cosigner, for that matter) will have your credit checked. Generally, the guarantor will need a more robust credit history and income verification in order to cover for a primary applicant’s shortcomings.

Recommended: How to Build Credit Over Time

Are You a Cosigner or Guarantor on Any Debt or Loans?

The only way to find out if you’re currently a cosigner or guarantor on any debt or loans is to review your paperwork. Reading legal or financial agreements in full before signing is important, as well as keeping copies of the agreements to refer to in the future.

When Is a Cosigner or a Guarantor a Good Option?

There are many reasons people choose to apply for unsecured personal loans, but not all personal loans are appropriate for all personal loan uses. For instance, if you’re planning to use a loan to consolidate existing, high-interest debt, it may be worth asking a guarantor or cosigner to help you meet that goal — whereas applying for a loan to take a vacation might not be so wise.

If you’re looking to build your credit history and need extra cash or a line of credit, you might consider an alternative such as a secured credit card or flex loan.

Only you can decide if going into debt is the right move in your scenario — but if your application could use a boost, a cosigner or guarantor could help.

Questions to Ask a Guarantor or Cosigner

One of the weightiest parts of making the decision to use a cosigner or guarantor is the process of actually asking someone to do you this favor, which is a big one. It’s important that there’s mutual trust in the relationship between the borrower and cosigner or guarantor, since their actions can have an impact on each other’s finances.

Some questions to ask your cosigner or guarantor before entering an agreement include:

•   Do you have a good credit score and solid financial standing?

•   Are you willing to take on this legal and financial responsibility?

•   What will our long-term agreement be if I, as the primary borrower, fail to make repayments and force you into the legal obligation to do so?

Personal Loans That Allow You to Use a Cosigner or Guarantor

Not all lending institutions allow applying for personal loans with a cosigner or a guarantor. If you aren’t able to qualify based on your own creditworthiness, you may consider asking the lender if they’ll allow a cosigner or guarantor. Comparing lenders until you find one that best fits your financial situation and needs is a good place to start.

The Takeaway

Guarantors and cosigners fulfill similar roles for a loan applicant, strengthening the application by taking on some level of financial responsibility for the loan.

SoFi offers a wide range of unsecured personal loans with competitive, fixed interest rates and with loan amounts to accommodate a variety of financial needs. We don’t charge origination, prepayment, or late fees, and you can check your rate in just one minute without affecting your credit score.*

Check your rate on a SoFi Personal Loan


Photo credit: iStock/FreshSplash

*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Source: sofi.com

How much will a secured credit card raise my score?

When you’re new to credit or your credit score is low, a secured credit card can be one of the most useful tools for credit building.

Sure, it’s not glamorous. Most of the time, it won’t offer rewards, and a high credit limit will require quite an investment. However, these seemingly unimpressive credit cards can make a world of difference for your credit.

A few years ago, I drove my credit into a ditch. My secured credit card got me out of it. Read on to learn how it happened and how you can increase your score with a secured credit card.

Check out all the answers from our credit card experts.

Ask Ana a question.

How much will a secured credit card raise my score?

It’s difficult to say how much or how quickly a secured credit card can raise your score. Everyone’s credit situation is unique.

For example, if you’re new to credit and building it from scratch, a secured credit card can quickly give you an excellent boost. On the other hand, if you’re rebuilding credit and have negative items on your credit report (such as late payments and defaults), the process will most likely be much slower.

Let me share a personal example of how I grew my credit with a secured credit card from fair to good in three years.

Back in 2018, my credit was in a sad place. I’d defaulted on two credit cards, had some minor collections spoiling the picture and only one paid-off auto loan to keep my score from sliding all the way down to the poor rating. Credit card issuers weren’t exactly fighting for my business, but Capital One approved me for the Capital One Platinum Secured Credit Card – and so my road back to good credit began.

It wasn’t fast, but my credit score was improving. I had some of the collections removed when I paid them off, thanks to the collectors’ courtesy, and by summer 2019 my credit increased from around 620 to 640.

remove negative items from your report when they’re accurate; creditors and credit bureaus strive to keep consumers’ credit histories truthful.

I used my secured card very cautiously. Originally, my credit limit was $200, although Capital One increased it to $500 after six on-time payments. I mostly put minor charges on the card here and there and paid them off right away to keep my credit utilization low.

In March 2020, Capital One silently tripled my credit line from $500 to $1,500 – not bad, considering my initial deposit was only $200. I called Capital One and asked if I could graduate to an unsecured card, and the representative offered me a product change to the Capital One Quicksilver Cash Rewards Credit Card.

Fast forward to March 2021, and my credit score was more than 50 points higher than what it was three years prior.

Sure, there has been more to my credit rebuilding strategy than just one secured credit card. I used Experian Boost, took out a new car loan and added more cards to the mix. But it was my secured card that jump-started my credit.

How to build credit with a secured credit card

Whether you’re starting to build your credit from scratch or, like myself, trying to fix it after a series of credit mistakes, a secured credit card can offer help.

Here’s what you can do to use it for your credit’s benefit.

Find a good secured credit card

Like any type of credit card, secured credit cards aren’t created equal. Pay attention to terms and fees. There’s no reason for a secured card to charge an annual fee, and some cards will also try to push hidden fees on you. Look for a card that will cost you only a security deposit.

My personal favorite secured credit card is the Discover it® Secured Credit Card. It’s the unicorn of secured cards since it offers cash back rewards: 2% back at gas stations and restaurants (up to $1,000 in purchases per quarter) and 1% on everything else. All the cash back you earn in the first year with the card also gets matched.

Practice good credit card habits

A secured card offers a chance to demonstrate responsible credit behavior. Do so by always paying on time and using less than 30% of your credit line for good credit utilization. For example, if your credit limit is $300, avoid having a card balance over $90 at any time. Paying in full multiple times a month can help you keep your balance under control.

The best practice is never to let the balance roll over to the next month. Not only will this ensure good credit utilization, it will also allow you to avoid expensive interest charges and credit card debt.

Ask for a product change

After your credit score has increased, it may be a good idea to call the issuer and ask for a product change. The issuer may be willing to upgrade you to an unsecured version of the card or a different card altogether. It may be possible even if your credit isn’t good yet, but you’ve been consistently showing good credit behavior for a year or two. Issuer loyalty often pays off.

Keep the card open

Even if you haven’t graduated on to a better card, keep your secured card open after it’s done its job. You may have more exciting cards now – and your credit may be good or excellent – but don’t give up on your old secured card (unless it charges fees). You can use it for minor charges, like your Netflix subscription, to keep it active.

Closing a credit card isn’t good for your credit, since it could negatively impact your credit utilization and lower the average age of your accounts. I’d suggest waiting a few years before closing your old card to soften the blow.

Bottom line

It’s hard to tell how much a secured credit card will increase your credit or how long it will take to build credit using this type of card. There are many factors at play, such as any negative information on your credit report and other types of debt you may currently have.

Still, a secured credit card can be a game-changer. Unexciting as it may seem, it can be a lifeline for poor credit or the first step for credit beginners.

Source: creditcards.com