How to Use a Secured Credit Card to Build Credit

secured credit card

If you have poor credit history, the only way to start establishing a stronger history is to open a credit account and start making on-time payments regularly. Unfortunately, people with poor credit will have a hard time opening a new credit account to start building their credit. That’s where the secured credit card comes in. A secured credit card can be opened by anybody, even if you’ve just gone through foreclosure and bankruptcy. With a secured credit card, you can start re-establishing your credit history and improving your credit score.

What Is a Secured Credit Card?

A secured credit card is essentially a pre-paid credit card. You have to put down a deposit first, which the bank will hold as collateral. Once you make the deposit, you can then lend up to that amount.

For example, if you put down a $500 deposit, you can then lend up to $500. This limits the risk for the bank, because if you don’t make your payments, they can just keep your deposit. It allows you to start building your credit and showing that you’re creditworthy without someone having to take a financial risk.

How Much Do Secured Cards Cost?

Unlike credit cards which make money on interest, secured cards usually make their money in fees. They’ll still charge an interest on the balance, but their money is primarily made in annual fees. Different banks charge different fees. Make sure you fully understand the fees before you sign the agreement.

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Where Can You Get a Secured Card?

Many banks and credit unions offer secured credit cards although some traditional banks are moving away from offering them. Try asking someone at your bank if they offer that service. If they don’t, then ask a few credit unions in your area.

Another option is to apply for a secured card online. If you do, make sure to carefully research any company you work with first. Do a search on them on sites like the BBB or RipOffReport. There are many unscrupulous financial websites out there.

Final Tips

Make sure you ask your lending company whether or not they report the card as a secured card. Some companies do, while others don’t. Having your card appear as an unsecured card on your credit report will look better than if you had a secured card.

Make sure you keep a balance on the card and that you make on-time payments every month, even if your balance is just $20. The goal is to build a history of on-time payments and stable accounts. It will take time but you will be well on your way to re-establishing good credit and restoring your credit score.