Is your credit history trashed? Maybe you went through a divorce and found yourself unable to pay your bills. Maybe you had to walk away from a mortgage. Or maybe you just had credit card charges you couldn’t pay off. Whatever the reason, if you find yourself in the position of having to rebuild your credit, a secured credit card can help you reach your goal.
What is a secured credit card?
Most credit cards are “unsecured,” meaning you are granted a line of credit when you open a credit card account and are expected to pay off the balance. There is no collateral involved (unlike, for example, a mortgage, in which the property purchased acts as collateral – if you fail to make payments, the property can be seized by the lender).
By contrast, a secured credit card is “secured” because it requires a collateral deposit. Sometimes the deposit is placed in an interest-bearing savings account, and sometimes the deposit does not earn interest. The deposit should remain untouched unless you fail to make payments, in which case it is applied toward the amount owed. The minimum deposit required is usually several hundred dollars. The deposit is refunded to you when you close the account.
In most other respects, a secured credit card is just like a normal credit card. You can use it wherever credit cards are accepted. Interest is charged if you do not pay off the balance in full each month, and a penalty is assessed if you make a late payment. The size of your credit limit is directly tied to the amount of your collateral deposit. Sometimes the total amount deposited equals the credit limit. Other times, the credit limit may be slightly more than the amount deposited.
Most secured credit cards charge an annual fee, the amount of which varies widely. Some secured cards may charge an application fee, a monthly fee, and/or a fee to increase your credit limit.
How a secured credit card can help rebuild your credit
You probably already know that if you have a credit card, paying at least the minimum payment on time is a positive thing for your credit history and credit score. The same applies to a secured credit card. However, when it comes to secured credit cards, it is crucial to ensure that the card issuer reports your activities to the major credit bureaus. Not all secured card issuers make such reports, so it is critical that you check this out before opening your secured credit card account.
The best way to quickly rebuild your credit with a secured credit card is to make a few purchases each month, and pay off the balance in full each billing cycle. Hopefully, it won’t take long to reverse your credit history (although that will depend on the damage you did before you needed a secured card).
How to get a secured credit card
Terms for secured credit cards vary dramatically, and you should be aware that some unethical card issuers try to take advantage of consumers desperate to get a credit card by charging unreasonably high interest rates and/or fees. It goes without saying that you should avoid such issuers, and instead look for a secured credit card that has a competitive interest rate (although hopefully you will pay off the balance in full each month and not have to pay interest). Some secured credit cards even offer benefits, such as rewards for spending.
Not all banks issue secured credit cards, but many reputable financial institutions still do. Start by asking at credit unions you may be a member of since they often have the most favorable terms. Check out Quizzle’s credit card recommendations to find a card that’s right for you.
And, of course, as mentioned above, when choosing a secured credit card, you want to be absolutely certain that the card issuer reports to the major credit bureaus.