Aug 31, 2012

Using Credit Cards to Build Credit

It is often said that money makes the world go round, but in today’s tough economic climate it may be more accurate to suggest that “credit” makes the world go round. Whether it be renting an apartment, buying a car, buying a home or even applying for a credit card, a positive credit score is vital, not only for approval but for favourable interest rates. A credit score is a representative number assigned to an individual that acts as an indicator of their creditworthiness and how risky is to lend money to them. Risk is a huge factor in interest rate calculations, and credit scores allow those with good borrowing histories to avail of preferential rates. For this reason, building a good credit score is essential for any consumer. Thankfully, there are some ways to improve your credit score.

How do Credit Cards Help to Build Credit

Nowadays, credit card companies offer credit cards to build a person’s credit. As a form of lending, standard credit cards report to credit reporting agencies like FICO. Based on a number of calculations such as percentage level of borrowing against available limits and repayment history, a credit score number is generated. This number improves with positive repayments and is negatively affected by missed payments or default. Unfortunately, it can be difficult for an individual to prove their creditworthiness after their score has been negatively affected, or if they have never had any previous lending. This is where credit cards to build credit come in to play.

Building credit with a credit card comes in several forms, but the most common is a secured credit card. A secured credit card offers a credit limit that is secured by a retained deposit, usually equal to the credit limit of the card offered. The credit card company is assuming very little risk, as the cash deposit is security should the borrower fail to make repayments. Even though this is not comparable to a standard borrowing, many of these cards specifically report repayments and card operations to credit agencies for the purpose of building positive credit scores. In this way, these cards can be excellent in repairing damaged credit scores, and many of them subsequently offer to be transferred to a non-secured card.

Best Credit Cards for Rebuilding Credit?

The Applied Bank Secured Mastercard and Visa credit card is one of the most popular credit cards to build credit. First and foremost, it reports to the three main credit reporting agencies. With an APR of 9.99% for both cash advances and purchases, it not only compares favourably to other secured credit cards but to many standard unsecured cards too. It is worth noting that there is no grace period on purchases, so to avoid any interest users should pay off any purchases immediately. There is a $50 annual fee charged when the card is first activated, but this is quite reasonable for a secured card.

The Centennial Secured Mastercard and Visa credit card also reports to the three main credit reporting agencies, but its APR is not as competitive as the Applied Bank cards. At 19.99%, the rate could be quite expensive for users, but the main point of these cards is to build positive credit scores, so balances should be paid in full any way. Unlike the Applied Bank cards, there is a 25 day grace period on purchases, and this can often negate the need for a lower interest rate. The annual fee in this case is $69, but acceptance is guaranteed with a security deposit of at least $200. This can be very attractive to some users with very poor credit, as they can struggle to get approved even for secured cards.

How do I Find the Best Credit Card for me?

Choosing the best credit card to build your credit can be tricky, but once you know what you are looking for then it becomes a reasonably simple task. The purpose of these cards is to build a positive credit score, so you should be aiming to clear the outstanding balance every month. This being the case, the APR is not an issue. However, if you think there might be a chance that you won’t repay the full balance every month, then you should consider the APR on offer. Many of these cards also charge an annual fee or an up-front fee, so finding the cheapest up front cost should be high on your agenda. It should go without saying, but you should also ensure that the card in question does report to credit reporting agencies. It may seem obvious, but there are secured credit cards that do not report to credit reporting agencies, and as such there will be no effect on the individuals credit score – defeating the entire purpose of the card. Finally, a card that offers users to opportunity to transfer to an unsecured card should be strongly considered, as these can prove easier and simpler for users in the long term.

Ultimately, using a credit card to build credit can be hugely beneficial for those that need their credit score improved, but it’s important that those looking to do so take their time in choosing the right card. Different cards will suit different users, so take your time, read the terms and conditions, and make a smart, rational decision. Always remember that these cards are there to serve a specific purpose. Stick to that purpose, and your credit score will slowly but surely improve.

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