If you plan to apply for a loan, purchase a home or lease a car, it helps to have a positive credit history. But if you have bad or limited credit, you are not fully out of luck. A secured credit card is one option that can help you build or rebuild the credit score.

What is a secured credit card?

These cards function the same as general credit cards. The initial difference is that with a secured card, you pay a cash deposit upfront to guarantee your credit line. Although credit history can be used to determine eligibility for a secured card, the line of credit it provides needs a security deposit. This deposit acts as a protection for banks to cover any purchases if you will miss payments. Making your monthly payments on time is as critical with a secured credit card as with a traditional card. Remember that if you default on your payments, the card issuer can keep your deposit.

A useful tool for rebuilding your credit

If you have bad credit, easily relying on cash, prepaid cards, or debit cards to make your buying will do nothing for your credit score because the activity does not get reported to the major credit bureaus. When handled appropriately, using a secured credit card to help establish or rebuild your credit may demonstrate to your credit card issuer and to the credit reporting agencies that you’re a responsible customer who used credit wisely. To build your credit and to avoid interest charges pay your balance each month, before the due date.

How secured credit cards work

Once the primary deposit is paid, secured cards work like unsecured ones:

  • You may use them wherever credit cards are accepted, including online
  • You may build and rebuild credit by using the card responsibly and paying your balance on time
  • You gain interest if you will carry a balance
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Many major credit card issuers provide secured as well as unsecured cards. Maybe, annual fees are very common, but you must not pay more than 50 dollars. You can discover multiple options with no annual fee at all among our favorite secured cards. If you cannot qualify for an unsecured card, a secured card may be the best tool as you look to improve credit. But it is as essential to be responsible with a secured card as it’s with any other loan or bill that shows up on your credit report.

5 Good Things About Secured Credit Cards

Secured credit cards may be a better choice for building or rebuilding your credit. There are 5 benefits that stand out for customers with blemished credit or no credit at all.

  • You may frequently get approved for a secured credit card when you cannot get approved for a traditional credit card. Paying the security deposit will swing the credit risk away from the card issuer.
  • They report to credit bureaus. Unlike a prepaid credit card which allows you to make electronic payments like with a credit card; a secured credit card will send your account history to the credit bureaus to be involved in your credit report.
  • A secured credit card may help you establish as well as reestablish your credit. Since payments are involved in your credit report, paying on time and managing your balance will help improve the credit score. After increasing your credit score, you can be capable of qualifying for a regular credit card.
  • Your security deposit is used if you default on payment. Until your defaulted balance is more than your deposit, you will not get sent to collections to default on your payments. Although the card issuer will keep your deposit, you do not have to worry about debt collectors hounding you for missed payments on the card. The late payments can hurt the credit score.
  • You may earn rewards on buying with some cards like Discover and secured cards of Navy Federal. If you pay your balance regularly before interest charges accrue, this may help to offset the amount of your security deposit.
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Drawbacks to Using Secured Credit

While secured credit cards may be appealing for those trying to improve their credit scores, there are some disadvantages.

  • It can be hard to come up with even a couple of dollars to make a security deposit. If you do have that money, it can be well spent paying off some outstanding debt. Try setting aside $25-$50 every month unless you have saved up enough for the security deposit.
  • There can be fees in addition to the deposit. On your selected card, you can pay an application fee, processing fee, an annual fee to get the secured credit card. This will increase the cost of having the card. You should get a card that has low fees.
  • You can pay a high-interest rate. Secured credit cards do not provide competitive interest rates due to the risk of default. To avoid high finance charges, pay your balance in full every month.

How to use a secured card effectively?

Though they need a deposit, secured credit cards are a powerful tool to rebuild credit. Here is how to use them most efficiently:

  • Use the card sparingly, making 1 or 2 smalls buying each month
  • Pay the balance fully each month. If you will pay in full, then there will not be any interest. Interest rates are higher than those on unsecured cards generally.
  • Keep an eye on the credit score; when it has improved, ask your issuer to upgrade it to an unsecured card.

Who are secured credit cards for?

A secured credit card may be the right fit for anybody who has bad credit, no local credit history, or cannot get approved for an unsecured credit card or line of credit due to recent financial issues like bankruptcy. By using a secured card responsibly, you can improve the score, and over time, manage an unsecured credit card, borrow money, and take out loans.

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credit repair consultantReady to repair your credit with a secured credit card? Our team at Masters Credit Consultants can provide you with the credit repair and rebuild services you need ASAP. We have more tips and tools to rebuild your credit and get you back on track ready for a loan.

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