People who have low credit scores may pursue a number of strategies to rebuild their score. Many of those with poor credit scores cannot obtain a regular credit card, because they are considered a high credit risk and are more likely to default on payments. However, these people may be eligible for a secured credit card. Used properly, this card can help the person's credit score improve.
Credit Reports
A person's credit score is derived from all the credit-related activity documented by credit reporting agencies and published in their credit report. This includes all records of lines of credit, both secured and unsecured, that an individual takes out. If the person demonstrates he can pay back money he borrows without defaulting, his credit score gradually increases over time.
Secured Credit Cards
A secured credit card is backed by some form of collateral. Usually, money deposited in a person's bank account provides the collateral for a secured credit card. If the person fails to pay off the card's debts on time, the company that issued the card can take money out of his account to cover the required payment. Secured credit cards generally are used only by people who cannot obtain credit cards not secured by collateral.
Differences
The main difference between a secured credit card and a normal, unsecured credit card is that the secured credit card attaches collateral to the borrowed funds. The credit limit on a secured card is equal to the amount of money deposited in the account. Unsecured credit cards are backed only by the customer's promise that he will make payments on time. As a result, credit card companies often are unwilling to issue unsecured credit cards to people with low credit scores.
Considerations
Use of secured credit cards will improve a person's credit score only if he makes timely payments on purchases made with the card. If the person fails to make the required monthly payment on time, causing the credit card company to withdraw money from his account, his credit score will decline further. However, if the card is used responsibly, the person's score will improve, which may allow him to qualify for an unsecured credit card.
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