Secured credit cards are a great way to rebuild credit. They’re also a good way for those new to credit to get a credit card and learn how to use it responsibly. A secured credit card requires a deposit, which is used as collateral against the cardholder's line of credit the cardholder. Yout deposit is refundable, although you should check the details of your particular card to find out what fees or restrictions may apply.
Where to Get a Secured Card
Many banks and credit unions offer secured credit cards, although the deposit amounts vary. It’s good to do some investigating and compare what each card offers. Some require a low deposit, but offer a limited line of credit. The APR for cards will vary, so shop around for the best rates. However, secured cards’ annual rates are always higher than with an unsecured credit card. Keep your secured card for only as long as you need it and switch to unsecured card when you can.
What to Look For in a Card
The point of a secured credit card is to build or rebuild your credit, so you want to choose the card that will do that best. It should report to all three credit agencies and you should be aware of the APR. Avoid cards that charge an application fee, and investigate any card before you invest in it. Compare the other fees as well, because some cards offer a very low APR, but charge more in other ways. Choose a card that gives you a credit limit of at least as much as you deposited.
Deposits are kept in an account that earns interest. With prompt payments to your bill, your deposit is returned when the secured credit card is cancelled and the account closed. This allows you to build savings while rebuilding your credit. When choosing a card, look closely at the fees and conditions surrounding your deposit refund. Some card will require the money to remain in the account for a billing cycle or two after you have closed the account. Other will require your account to have a zero balance before refunding your deposit. Choose the unsecured card that offers the best options, and make sure you know the closing conditions. Some secured cards will convert to an unsecured card after a period of time, and the issuer will return your deposit when the conversion occurs.
Using a Secured Credit Card
The best way to use your secured card is to make a few purchases that you then pay off when the statement comes. Secured credit cards aren’t meant to carry a balance. Linda Sherry, editorial director of Consumer Action, advises that “It helps to pay in full every month to show you’ve got this excellent credit rating.” Paying your secured card off every month shows that you are using your credit responsibly.
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