What happens if I add money to my credit card?

Supercharging Your Credit: What Happens When You Add Money to Your Credit Card?

The world of credit cards can sometimes feel like navigating a labyrinth of fees, interest rates, and confusing jargon. One question that often arises, especially for those with less-than-stellar credit history, is: what happens if I actually add money to my credit card? The answer is a little nuanced and depends heavily on the type of card we’re talking about. Let’s dive in.

We’re specifically addressing the scenario of adding money upfront to a credit card before you even start using it. This situation typically applies to secured credit cards.

Secured Credit Cards: Your Building Block to Better Credit

Secured credit cards are designed for individuals with limited or damaged credit histories. They act as a stepping stone to rebuilding credit and accessing traditional, unsecured credit cards. The key difference lies in the requirement of a security deposit.

The Deposit: Your Safety Net, Not Your Piggy Bank

When you apply for a secured credit card, you’ll typically need to provide a cash deposit to the issuer. This deposit is held as collateral and serves as a guarantee to the credit card company that they won’t suffer a significant loss if you fail to pay your bills. This is where the “adding money” aspect comes in.

Here’s what happens with that upfront deposit:

• Establishes Your Credit Line: Your deposit generally determines your initial credit limit. For example, a $500 deposit often translates to a $500 credit limit. This is a crucial point to understand; the amount you deposit isn’t extra spending money on top of a credit limit. It creates the limit.

• Acts as a Security Blanket: The deposit sits safe and sound with the issuer. It’s not intended for you to draw upon to make your regular monthly payments. Think of it as a safety net, only used if you default on your obligations.

• Not Used for Monthly Payments (Usually): This is the most important takeaway. While some exceptional situations might allow for the deposit to be used if you completely fail to pay, the goal is for you to use the credit card responsibly and make your payments on time. The deposit is there as a last resort.

Why Isn’t My Deposit Used to Pay My Bill?

The entire point of a secured credit card is to help you establish a positive credit history. Using your deposit to pay your bills defeats this purpose entirely. You need to demonstrate responsible borrowing and repayment by making timely payments from your own income.

So, How DO I Use a Secured Credit Card?

Treat it like any other credit card (albeit with a lower credit limit).

1. Make purchases: Use the card for everyday expenses, staying within your credit limit.
2. Pay your bills on time: This is the most critical step. Pay at least the minimum amount due, but ideally, pay off the entire balance each month to avoid interest charges.
3. Monitor your credit report: As you make responsible payments, your credit score will gradually improve.

The Payoff: Getting Your Deposit Back and Graduating to Unsecured Credit

The ultimate goal of using a secured credit card is to improve your credit score to the point where you can qualify for an unsecured credit card. Once you’ve demonstrated responsible credit management for a period (typically 6-12 months), you can often request to have your account reviewed. If approved, you’ll receive your initial deposit back, and your account may be converted to an unsecured credit card.

In Conclusion:

Adding money to a secured credit card upfront is a crucial step in establishing your credit line and provides security for the issuer. However, this deposit isn’t meant for making monthly payments. The real value lies in responsible card usage and consistent, on-time payments, which will ultimately lead to a stronger credit score and access to better financial opportunities.