880 Walkers Line, Burlington, ON, L7N 2G2, Canada

How a Secured Credit Card Helps Build Credit Score

How a Secured Credit Card Helps Build Credit Score

We often recommend using a secured credit card to help rebuild credit in advance of an auto loan in Woodstock. It’s a viable method of using credit while keeping a tight rein on spending. But how do they work and how can they help you rebuild credit?

 

We asked our Woodstock auto loans team to explain how secured credit cards work and how they can help rebuild credit ready for a car loan.

 

What is a secured credit card?

 

A secured credit card works much like a standard credit card but with one key difference.

 

Rather than providing credit like a standard card, a secured card requires a cash deposit equal to the credit limit from you to guarantee the card.

 

For example, if you applied for a secured credit card with a $1,000 credit limit, you would need to put down a $1,000 deposit on the card.

 

You make monthly payments the same as you would for a standard credit card and can clear the balance in exactly the same way.

 

If you miss a payment, which we hope you don’t, the amount plus a fee is taken from your deposit.

 

The idea is to provide all the facilities of a credit card for those with no or poor credit. They are ideal for newcomers to Canada, those recovering from bad credit or bankruptcy or young people who have yet to build up a credit score.

 

How to secured credit cards help build credit?

 

A secured credit card helps build credit in the same way a standard card does. Your monthly payments are reported to the credit bureaus and will help create a positive payment history.

 

As your payment history can make up to 35% of your credit score, the more entries on here, the higher your score will go.

 

Manage the credit card sensibly and you can begin rebuilding credit within 3 months!

 

Paying a secured credit card also helps with your credit utilization ratio. This is a measure of how much of your available credit you’re using.

 

If you have $1,000 of available credit on a card and clear it each month, your ratio for that card will be almost zero. Anything up to 30% utilization will be viewed positively by the credit bureaus, go over that and it will negatively impact your credit score.

 

Rebuilding credit ready for an auto loan

 

Rebuilding credit is a slow, steady process. It will take a little while for you to begin seeing benefits from your efforts but you will see them.

 

Depending on the credit card issuer’s reporting period, it may be a month or two before you see your first payment. From then, you should see each month’s payment appear in your payment history.

 

Expect to use a secured credit card for 6-12 months before your credit score increases considerably.

 

Once you have used it for that long, you could switch to a standard credit card and use that to help credit. You’re probably also in a good position to apply for a car loan.

 

We will use all our skill and experience to deliver the lowest possible Caledonia auto loan rates, guaranteed. Contact Car Nation Canada Direct to learn how we can help.

 

Thanks for reading. Be sure to connect with us on Facebook, Twitter, Instagram, or LinkedIn to stay up to date on our latest great articles!

Categories: Auto Loan

Tags: ,