How to Use a Secured Credit Card to Build Credit

A secured credit card can be opened by anybody, even if you’ve just gone through foreclosure and bankruptcy.

If you have a poor credit history, the only way to build credit is to open an account and start making on-time payments regularly. Unfortunately, people with poor credit will have a hard time opening a new credit account to begin rebuilding their credit.

That’s where the secured credit card comes in. 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 have 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. The $500 will earn you interest, just as it would if you had put it in a savings account.

This takes the risk away from the bank because if you don’t make your payments they can just take 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 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.

Where Can You Get a Secured Credit Card?

Many banks and credit unions offer secured credit cards. Some traditional banks are moving away from secured cards, but many of them still offer this service.

Try first asking your banker if your bank offers a secured credit card. If they don’t, then ask a few credit unions in your area.

If you can’t find one in person, you can always apply for a secured card online. If you do, make sure to research any company you work with first carefully.

Do a search on them on the BBB and 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.

Your card appears as an unsecured card on your credit report but that will look better than 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.