Secured Credit Cards can help people with bad or short credit histories. You can build your credit in a few months so that you can apply for a more rewarding unsecured card.
Below, you can find out what steps you can take to find out how to choose your first credit card.
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What is a Secured Credit Card?
A secured credit card is a type of credit card that is backed by a cash deposit from the cardholder. These deposits act as collateral, which provides the card issuer with security in case cardholders cannot make payments.
Secured credit cards are often issued to subprime borrowers or those with limited credit histories in order to help you get started.
The deposit reduces the risk to the credit card issuer. If you don’t pay your bill, the issuer can take the money from your deposit. That’s why these cards are available to people with bad or no credit.
Secured vs. Unsecured Cards
Whether you need a secured or unsecured card it all comes down to how good your credit is.
Unsecured cards don’t require a deposit and therefore pose more risk to the issuer, credit-card companies typically require at least average credit, and good or excellent credit for the higher tier cards.
Some unsecured cards advertise themselves easy to qualify with or without bad credit. However they generally charge much higher fees, so I recommend that you get a secure card over an unsecured card with higher fees.
How Secured Cards Work
Once the initial deposit has been made secured cards work just like any other card.
- You can use them wherever credit cards are accepted, including online
- Build or rebuild your credit by using the card responsibly and paying your balance on time
- Incur interest if you carry a balance
How to Use Secured Cards Effectively
Although they require a deposit, secured credit cards can be a fantastic tool for rebuilding credit. Here’s how to use one most effectively:
- Use the card sparingly
- Make only one or two small purchases every month
- Pay your balance in full every month before the due date
- When you pay in full, you won’t be charged interest
- Interest rates on secured cards are generally higher than those on unsecured cards
- Keep an eye on your credit score over time; when it has meaningfully improved, ask your issuer about upgrading to an unsecured card
Conclusion
While secured cards generally require a deposit and may not offer the best APRs, these cards can be helpful for those having trouble getting approved for a traditional credit card.
Hopefully after reading this you understand how a secured credit card works! Be sure to do proper research and learn whats best for your account!
Additionally, If you are interested be sure to check out our list of bank bonuses and CD rates!
