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Secured credit cards are designed to help individuals improve their credit history and score. However, these cards differ from traditional unsecured cards in a few ways, and it’s important to understand all the details before you apply for a secured card.
A secured card is one with a credit limit that’s secured by collateral you put up. In the case of these cards, the collateral is a cash deposit you make to secure the credit limit. Typically, your credit limit is equal to your deposit, and you may have an option for how much that is.
For example, some cards allow you to deposit $200 to $3,000 to open your card account. So if you choose to deposit $500, your credit limit will be $500.
Your deposit is held by the credit card company the entire time you have the card. If you fail to make payments on your balance in a timely manner, the credit card company may close your account and use the deposit funds to cover its losses. This reduces risk for the lender, which is why these card companies are willing to offer credit cards to people with no or bad credit.
Once you close your account—assuming you’ve paid off your balance—you get your security deposit back.
Other than the factors surrounding the security deposit, a secured credit card typically works like any other credit card. You can use it to pay for purchases anywhere it’s accepted—these are usually Visa or Mastercard cards, so they’re accepted widely. If you carry over a balance each statement cycle, you’ll be charged interest on it in keeping with the rates associated with your card.
Secured credit cards aren’t a magic elixir for your credit. You have to manage these accounts appropriately to get the benefits. Here are some tips for building credit with a secured credit card.
Tools like our Credit Report Card can help you keep track of your credit score and the factors affecting it so you can make good and informed decisions when building credit.
When shopping for a secured credit card, consider the following factors:
Once you’re approved for and start building credit with a secured card, continue to plan for your financial future. At some point, hopefully, your credit will improve enough that you qualify for cards with better rates, limits, and perks.
Once you establish new cards, you might consider closing your secured credit card account because you may not want to keep paying an annual fee on a card that no longer serves your needs. However, closing your account might hurt your credit by potentially increasing your credit utilization ratio and also by affecting your average credit age, so weigh the pros and the cons of closing your card before making a choice. Visit Credit.com to learn more about our products like ExtraCredit® that could help you stay on top of your credit.
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