How Do Secured Credit Cards Work?

Secured Credit CardsQuestion: How do secured credit cards work?

Answer: This is a question I hear all the time. One reason is because so many consumers’ credit scores took a big hit during the recession. As a result, many people are having trouble qualifying for an unsecured credit card. Another reason this is a common question is because the CARD Act made it more difficult for young adults without a credit history to get an unsecured card. So whether you need to rebuild your credit or establish it, a secured card might make sense.

Here’s how it works: You make a deposit in a savings account and that “secures” the card. So let’s say you deposit $500 in a savings account. That $500, less any fees, becomes your credit limit. You have to carefully read the disclosure statements for secured cards. A few of them have long lists of fees and this can eat into your credit limit. So take your time and really compare secured credit cards.

Now, remember that your objective with a secured credit card is to establish a good credit history so that you’ll qualify for an unsecured card down the road. While researching cards, make sure the issuer reports to all three major credit bureaus. If you can’t confirm this from the disclosure statements, call the issuer and ask. Also, don’t revolve a balance (APRs on most secured cards are high) and pay your bills promptly. Over time, you’ll see your credit score improve.

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