What Is A Secured Credit Card?

For those who have credit that is bad, limited or nonexistent, secured credit cards are one of the most common ways to build or rebuild credit. Say you recently went through a divorce or immigrated to the US — your credit history (or lack thereof) might not qualify you for an unsecured credit card, and even if it does, the credit limit might be much lower than you'd like.

How does a secured credit card work?

You make a deposit that the credit card company uses as collateral, and this amount acts as your credit limit. The more you deposit, the more you can spend on the card. The minimum is usually $300, and most cards can go up to the thousands. You still have to pay your monthly balance, interest rates and annual and application fees.

Why should I bother using a secured credit card?

Think of it as a stepping stone. Secured credit cards are ideal for people who are building credit, and once you consistently pay off the balance for a few months, you should be able to qualify for an unsecured credit card. Secured credit cards force you to limit your spending to what you can afford, but they're often better than prepaid cards because they allow you to build credit. However, the ultimate goal should be to obtain an unsecured credit card; it's not a good idea to hold on to a secured credit card for too long if you don't have to, as they usually have higher interest rates and annual fees than unsecured ones.

Read: How To Get A College Student Credit Card

What should I look out for?

Most importantly, make sure that the secured credit card you apply for reports to all three major credit bureaus, so that it will actually help you build credit. As always, beware of scams and fraudulent credit card hawkers that offer vague or "guaranteed" deals.

It is essential to compare rates and fees of a variety of credit cards to make sure you get the one that is best suited to your lifestyle. A credit card with a high annual rate and zero interest might be good for someone who plans to carry a balance over from month to month, while a credit card with a lower annual rate and higher interest is better for someone who can pay the full balance each month.

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