Secured credit is an excellent way to rebuild credit, improve credit scores and help you learn how to manage credit and debt.
Secured credit cards are issued by credit card companies, banks and credit unions. The credit card is secured by a deposit.
That deposit generally determines your credit limit and must remain on deposit as long as the credit card remains secured. Some secured credit cards may convert into unsecured credit cards after 12 months of on-time payments.
A secured credit card is a sure way to raise credit scores if managed correctly. But, you can further increase your credit scores by piggybacking a secured credit cards.
Here is how piggybacking secured credit cards works:
Step 1: Apply for a Secured Credit Card
First, open a secured credit card at your bank, credit union or other credit card issuer such as the OpenSky® Secured Visa® Credit Card.
Step 2: Request a Cash Advance
Next, get a cash advance on the new secured credit card but do not spend the money.
Step 3: Open a Second Secured Credit Card
Use the cash advance to open another secured credit card. Once you open the second secured credit card get another cash advance.
Step 4: Deposit Cash in Savings Account
Take the cash advance from the second secured credit card but this time deposit the cash into an interest bearing savings account. Use the amount deposited into the savings account to make on-time payments on the two secured credit cards. In order to raise your credit scores you must make on-time payments and never max out your credit cards. In fact, once you obtain the cash advances keep other purchases to a minimum.
Piggyback secured loans
If you really want to raise credit scores use the above method to piggyback secured loans. Use a bank loan to establish credit good credit. The credit scoring model gives more weight to a bank loan. A bank loan indicates to the credit scoring model you are a good credit risk.
You will not need a co-signor for a secured loan. A savings account will serve as security (collateral) for the loan. The credit requirements are typically easier as the collateral is your savings account deposit. Secured bank loans usually start small, most likely under $1,000. But this is great if you are short on cash. A secured loan as small as $300 can help your credit score.
Just keep in mind the savings account cannot be removed while the loan remains unpaid. Once the loan is paid off and closed, the savings account will be made available for withdrawal.
Because secured bank loans can be opened with relatively minor deposits, you do not have to stop at just one secured bank loan. You can repeat the process at a second bank and now you have two bank loans reporting to at least one of the credit bureaus. Some banks may report to the 3 major credit bureaus, Experian, Equifax and Transunion.
Bank loans rank high in credit scoring. You must make sure the loans are small enough that you can handle making on-time payments. Try to pay before the actual due dates; and, if possible, pay more than the minimum due in the beginning of the loans. When the banks report to the credit bureaus they will show these payments and you will have established an excellent payment history within (45) days of obtaining the loans.
Credit Bureau Reporting
Before obtaining any secured credit account make sure the bank or credit card issuer does the following:
- Reports to at least one of the three major credit reporting agencies, Experian, Equifax and Transunion
- Reports the credit limit as well as the account balance
- Does not report the account as secured, it should report just like an unsecured credit card or loan. The credit reporting agencies may ding you if the account is reported as secured
Avoid any secured credit card account or secured bank loan that does not adhere to the above three statements. They will not improve your credit scores unless they report to at least one of the major credit bureaus and reports your credit limit.
