What is a Secured Credit Card?

An illustration of a credit card and a shield with a check for the use of a secured credit card to build credit and payment history.

Secured credit cards – the answer to no credit

We recently talked about some good credit options for new consumers starting out with credit and trying to establish credit for the first time. For some, the best option is a secured credit card.

Sometimes having no credit and having bad credit are the same thing in the eyes of creditors. Your answer should be the same in either situation; establish a new credit account and use it very carefully, paying your monthly payments in full and on time.

If you have no luck getting a credit card from a retailer, department store, or gas company, talk to your bank (wherever you keep your savings or checking) and ask for a secured card.

How a Secured Credit Card Works:

With a secured credit card, you deposit money with the financial institution that guarantees your revolving loan. If you don’t make your payments, the bank takes the money you deposited to cover the unpaid amount.

It’s crucial that you never let this happen. If you have a secured credit card and you don’t make your payments, your credit will be devastated. It will take you much, much longer to recover from such a hit to your credit rating. Secured cards are your last, best option for establishing or re-establishing credit, and if you blow it by not making your payment, you won’t have many options left.

There may be small fees associated with secured cards (application & processing fees, annual fees, etc.), but these are a small price to pay for the power of a secured credit card account to help you restore your credit. Because the account is secured by your deposit, the risk to the lender is very low, so there’s little reason for you to be rejected. (If your income is too low, or you don’t maintain an account with the financial institution you’re applying with, your application for a secured card may still be denied).

When applying for a secured card, make sure the bank reports your good payment history to the major credit bureaus. Then, when your secured credit card account is opened, use it modestly, making a few small purchases each month. Be sure to pay more than the minimum monthly payment, or better yet, pay the balance in full every month.

After six months or a year of this kind of consistent payment history, your bank will return your deposit to you and make your secured card a full-fledged credit card. Continue to make your payments responsibly and your credit rating will only improve.

Article written by
Melinda Opperman
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.

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