What Lenders look for and how credit cards build your credit score

The Importance of the Almighty Credit Card to build an elite credit score 

Credit Cards are a major factor in your FICO Score and are the foundation of building an elite credit score.

Having “No” Credit Cards is a red flag to lenders and keeps you on the bottom tier as a qualified borrower. Lenders like to see a long history of responsible credit use, and if you don’t have a card, you might not have much information to show. Although it seems counterintuitive, not having any credit cards will actually hurt your credit score as much as having too many. You need credit cards in order to have a high FICO, simple as that. You might be thinking well I can’t get approved for a credit card but this article will give you options to obtain one.

How Many Major Credit Cards Should You Have?

The answer would be 3 and the average American has 3.2 credit cards. Consumers with good or fair credit can obtain an unsecured credit card. Those with bad credit can use the secured credit card option to get a credit card and build credit.

The magic number is 3  credit cards but that doesn’t mean you just start applying for any credit cards.  You should always know your FICO BANKCARD 8 SCORE from all three credit bureaus. 

What is a Secured Credit Cards?

A secured card is an excellent option available for those with bad credit and wants to rebuild their credit. The biggest difference between a secured and an unsecured credit card is that secured cards require a security deposit from the cardholder, which functions as cash collateral against you defaulting on your payments.

Secured credit cards are especially useful for consumers with poor or little to no credit history who are not eligible to receive unsecured credit cards. 

A secured card can almost guarantee approval from the lending institution because, in effect, you are the one taking on the financial risk through your security deposit.

Think of your secured card as your credit line “training wheels” that allow you the benefits of owning a credit card while giving you the opportunity to build a responsible credit history by making your payments on time. The small credit limits and security deposit requirements are there to protect you from getting yourself into the poor payment history that may have plagued you in the past.

Secured card credit limits are often set at the amount of the security deposit or some percentage of it so that you cannot charge more than your security deposit can cover. 

Depending on your specific secured card, adding more to your security deposit enables you to access a higher credit limit, or if your payments are on-time and consistent, the credit card company may reward you by increasing your credit line without requiring additional deposits.

Many secured cards increase the credit limit of your secured card after 6-12 months of responsible use and on-time payments.

How Do the Credit Bureaus View A Secured Credit Card?

The secured credit card gives you the same exact benefits as having an unsecured credit card because the FICO scoring system doesn’t care and reports it as a  secured credit card.

Once you start using your secured card and making payments on time your credit limit and your utilization ratio are considered in the calculation. The scoring system penalizes you and detests late payments and high utilization ratio so use the card responsibly and keep your balances low. 

Will you get approved with bad credit?

Yes, you can get denied and many people do get denied every year. This sounds crazy but the issuing bank just doesn’t think you will make payments and just doesn’t want to be bothered with all the hassle. Most secured cards run a credit check but 90 percent of consumers with bad credit scores are approved.

Secured Credit Cards for good or fair credit 

A lender is going to consider several key factors when you apply for credit. These may include checking all three of your credit reports to make sure you have a history of on-time payments. 

Depending on the card you’re applying for, the issuing bank may want to see several years of on-time payments. Looking at a credit report gives the lender a more detailed picture of your financial history than a single credit score number can.

Your income is also a factor when applying. This isn’t on your credit reports but credit applications always ask how much you make each year.

The credit card issuer wants to make sure you have a steady income before extending you a line of credit. Sometimes, the bank will ask for additional documents, like tax returns, to support the annual income you write on the application. 

The income you put on the application will determine the credit limit you’re granted by the issuer along with  your monthly housing cost:

Credit card applications often ask about your housing situation: whether you rent or own, and what your monthly payment are. If your monthly housing expense seems high relative to your income, that may keep a bank from approving you for new credit or factor into the terms which may reflect in your interest rates and credit limit.