How to Build Your Credit History With Secured Credit Cards
Secured Credit Cards Can Help Build Credit
If you have a low credit score or your credit is not well established, a secured credit card could be the best option for you. Just as there is likely a "best credit card" offer out there for you, based on your budgetary and other credit-related needs, so too is there a best secured credit card offer. If you have bad credit, you need to know this going in: Almost every secured credit card charges an annual fee, and these fees vary, depending on your credit score.
Credit problems — including everything from declaring bankruptcy to home foreclosures may require you to get a secured credit card. Simply put, if you have a questionable credit history or one that has not yet been established, you may not qualify for a regular credit card. And for many people, especially young adults with no credit history to speak of, a secured credit card is often a good way to establish or re-establish credit.
How does a secured credit card work, exactly?
In the simplest terms, a secured credit card requires a cash deposit as collateral. That cash deposit, whatever amount it is, then becomes the credit line for the account. It may help you to think of a secured credit card account as more of a savings account; you can only make credit card charges based on how much money you pay upfront. For example, if you put $1,000 into a secured credit card account, you can only charge up to $1,000 on the card. If you show that you can stay within those limits, the bank may reward you with an increased credit line — without requiring additional deposits.
How do I know what is the best secured credit card for me?
Just as it is with all types of standard (or "unsecured") credit cards, not all secured credit cards will be right for you. So when you're doing research, consider starting by contacting a reputable credit union.
Credit unions exist not only worldwide, but also in each of the 50 U.S. states. By definition, a credit union is a cooperative financial institution that is owned and controlled by its members. Credit unions differ from banks and other financial institutions in that the members who have accounts in the credit union are the owners of the credit union.1 Some experts say that about one half of the nation's credit unions offer secured credit cards to members, many of which may offer lower interest rates.2
Additionally, try looking for secured credit card offers that don't charge an application fee. Remember, every secured credit card will charge an annual fee — some of which will be so high that you may be convinced to abandon the idea altogether. Other offers may require you to purchase additional items, such as insurance policies on the card, or pay for other, seemingly unrelated charges meant to take advantage of your compromised or unestablished credit status.
Can I get a secured credit card through a bank?
Many — but not all — banks offer secured credit cards. In fact, fewer banks are offering secured credit cards these days, with a growing tendency towards lower credit limits and higher interest rates and fees.
Still, in today's buy-now-pay-later world, it's easy to damage your credit — even if you're just starting to establish a credit history. Banks know this, and while the trend is moving towards lowering the number of secured credit card offers (especially to those who have already gotten credit and then tarnished it), if you are just getting started on establishing credit, your timing may actually be good.
We live in a society that's increasingly dependent on credit cards. It's almost impossible to rent a car or book a hotel room without one, in fact. For people with poor credit histories, a secured credit card may be the only option available.
And if you're new to the credit-building process, a secured credit card can be a very good place to start, because it doesn't allow you to exceed your spending limit. Heeding such valuable credit lessons early on can make financial matters significantly brighter and easier down the road.