How to Use a Secured Credit Card to Fix Damaged Credit

Fixing damaged credit is not a fast or simple process, but it is possible by slowly using credit responsibly. When you have bad credit, it will be hard to get a new loan or even a credit card. Lenders become wary that you may default on the debt, so they will ask for an assurance from you this will not happen. There are many possible assurances: a down payment, a cosigner or, perhaps the best method, collateral. Placing collateral will "secure" the loan.

Step 1: Secure the Loan

You will need to have an asset of value in order to properly secure your loan. The bank will provide you with a "loan to value" ratio depending on the type of asset you are willing to collateralize. Typically, more liquid assets are easier to collateralize. Liquidity simply means the asset is easily turned into cash. For example, a stock certificate or savings account is more liquid than real estate. Since you only need a small line of credit, an asset worth $5,000 to $10,000 will suffice.

Step 2: Flex your Credit

Having a credit card will do nothing for your credit score if you do not use it. You may see a small bump in your score, but future lenders want to see you actually managed the funds well. Use your credit card for some day-to-day purchases you can easily afford. Typically, credit cards are used more for luxury purchases. However, when you have bad credit, you should avoid these types of large purchases and just stick to the basics. Buy groceries, gas and other basics with your card to get started. If you see your balance go too high in a given month, stop using the card immediately.

Step 3: Make Regular Payments

You should not just pay the minimum payment amount. Instead, you should be aiming to pay down your balance every time you receive a bill. If for some reason you cannot pay down your balance one month, at least assure you are not exceeding 10% of your total credit available. Having a balance over 10% is a bad sign to creditors, and your score will end up dropping instead of increasing. That is why it is best to continue making small purchases you can easily pay off each month on your card as you continue to rebuild your financial stability.

Step 4: Request Line Increases

Your original credit line may have been very small due to your low credit score. However, once you have established yourself with the company, you should be able to request an increase. Having a larger loan that you are still maintaining a low balance on is good for your credit score. Future creditors will be able to see your credit card company was happy with your performance and granted you more funds as a result. With a line increase, you will also be minimizing the risk you have through your collateral. If the line is more valuable than the collateral you have on hold, the lender is actually assuming the greater risk in the loan.


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