A credit card is a line of credit that allows you to borrow money each month with the promise that you will repay what you borrow. Credit cards are a great way to start building your credit because your behavior with the card is reported to the three major credit bureaus.
In order to get a credit card you have to go through an application process. Your credit score, income, and current debt will all be taken into consideration for the approval process. These factors help show the financial institution what type of risk they are taking on by lending you money and also if you will be able to pay back what you borrow. Once you are approved, the card is issued, and you can use it for whatever purchases you want. At first your credit limit may only be a small amount, but as time goes by and you show you are responsible, your credit limit can be increased.
Credit cards should be used wisely. Remember that you are borrowing money, so make sure that whatever you borrow, you are able to pay back. If you use credit cards to buy things that you cannot afford you may not be able to make your payments, or, you may be forced to pay late. Both of these actions will negatively impact your credit score.
A secured credit card has many of the same features as a credit card however a notable difference is that your credit limit for a secured card is actually a deposit that you make. This means that your own money is being used as the collateral for the loan. For example, if you want to have a line of credit for $1,000, then you have to make a deposit of $1,000, which is held over the life of the card. If you want to increase your credit limit, then you must deposit more of your own money to go towards the collateral.
This option is often for people who are high-risk borrowers, meaning they have no credit anywhere else, or they are working on rebuilding their damaged credit. The benefit of secured credit cards is that the issuing institution will report your behavior to the credit bureaus, which in turn, will affect your credit score.
When you choose to move on to other forms of credit building, you can close your secured card. When a secured card account is closed, your deposit which was being used as your collateral will be returned to you. So, if you put $1,000 down as your credit line you will get your $1,000 back once the account is closed.
A secured credit card should be seen as a credit building tool, meaning you should still pay attention to the details that affect your credit score, even though it seems that you are borrowing from yourself. If you want to learn more about what affects your credit score, you should read, “What Affects My Credit Score?”
A share secured loan allows you to use your own savings as collateral for the loan. These loans are simple to apply for and can help build or repair your credit score.
Share secured loans are fairly similar to secured cards; you are using your own money as collateral for the loan and you must make monthly payments. The difference between the two is that a share secured loan is a fixed amount of borrowed money rather than an open credit line.
If you were to get approved for a share secured loan, the process would work something like this: First, you would have to designate how much money you would like to borrow. For this example, let’s say $1,000. Next, you would deposit the $1,000 into your savings account. The financial institution would then put a hold on those funds so that you could not withdraw or have access to them. The financial institution would then credit $1,000 to your checking account for the loan. You would then repay the loan over a fixed period of time with a fixed payment. Your payment history and amount borrowed is reported to the major credit bureaus, which in return affects your credit score. This process makes share secured loans ideal for people who are new to building credit or people who have damaged credit and are trying to rebuild their credit score.
With credit cards and other loans comes financial responsibility. If you want to have a good credit score, you will need to work to obtain it. You should organize your payments and always strive to honor your financial responsibilities.
Take a minute to look into the future…do you foresee having to borrow money to buy a car or a home? If you answered yes to this question, then you should probably start building your credit today. Starting early will help to build your credit score, so when the time comes to buy a car or a house you will be able to get the best interest rate possible.
If you need additional help, come in to Beehive FCU and meet with one of our Consumer Loan Officers. They can discuss your credit options with you and help you begin to build your credit score so you can achieve your goals.