Content provided by Bankrate.com. New York Post and its content partners earn compensation from the affiliate companies that appear below. This content does not include all available financial offers, and compensation may impact how and where links appear in the content.
A good credit score is the key to many financial opportunities. But if you’ve faced financial setbacks or made mistakes in the past, the path to building credit feels like an uphill battle.
A secured credit card could be a strategic move to help improve your credit. These cards allow those with poor or no credit to rebuild their score and show responsible financial behavior.
Read on to learn how secured credit cards work and why you should consider one if you have bad credit.
How do secured credit cards work?
To get approved for a secured credit card, you’ll need to provide a cash deposit upfront as collateral. This deposit ensures the card issuer has the funds to cover missed payments or defaults.
Generally, the amount of your security deposit determines your credit limit. For example, if you apply for a secured credit card with a $500 deposit, you’ll receive a credit limit of up to $500.
“It’s important to understand that a secured credit card is not a typical credit card,” says Taylor Kovar, certified financial planner and CEO of Kovar Wealth Management. “It’s backed by a cash deposit. This structure makes this type of credit card accessible to individuals with low or no credit history.”
Secured credit card issuers report your payment history and credit utilization to the major credit bureaus. Using your card smartly can boost your credit score over time. This means paying your balance in full each month.
Many secured card issuers also offer the chance to graduate to an unsecured credit card. This means you may be able to get your security deposit back and transition to a regular credit card in the future.
“Just like all forms of credit, consumers who use secured credit cards should do so responsibly to ensure their credit stays in good shape,” says Christina Roman, consumer education and advocacy manager for Experian.
Secured cards vs. unsecured cards
You may be more familiar with how unsecured cards work: The credit issuer grants you a credit line without putting up any money or collateral. For example, if you’re approved for a $1,000 credit line on an unsecured card, you don’t have to deposit $1,000.
Unsecured cards offer greater flexibility and higher credit limits compared to secured cards. They’re typically available to individuals with fair to excellent credit scores.
With an unsecured card, you can make purchases up to your credit limit and pay off the balance over time. Like with a secured card, using your unsecured card wisely is important to maintain and improve your credit score.
“Both can impact a consumer’s credit depending on how they use it,” says Roman. “If consumers miss payments, their credit scores could be negatively impacted. If they make their payments on time and in full every month, this can potentially help them build a solid credit history, and they may see their credit score increase.”
If you have poor credit, you may not qualify for an unsecured card. Even if you qualify, you may want to start with a secured credit card to build up your score and establish smart card habits.
Choosing the right secured credit card
When building credit with a secured credit card, ask yourself these questions:
- What is the required security deposit? Knowing the security deposit amount will help you determine if it aligns with your budget and desired credit limit.
- What is the interest rate? Secured credit cards also come with high-interest rates. While you’re ideally paying off your balance in full each month and won’t pay interest, shopping around for the best rate doesn’t hurt.
- Are there any annual fees or other charges? Some secured cards charge fees like annual fees, monthly maintenance fees, foreign transaction fees, and balance transfers.
- Will the card issuer report to credit bureaus? You want to make sure your card issuer files these reports, as it establishes responsible credit history. In addition, review how frequently the issuer reports your activity to the credit bureaus.
- Is it possible to graduate to an unsecured card? Some secured card providers offer this option when you’ve established a positive credit history.
- Are there any rewards? While secured cards typically have fewer rewards, it’s worth asking if any benefits or perks are associated with the card, such as cashback or points for specific purchases.
- Can I increase the credit limit over time? Increasing your credit limit can help lower your credit utilization ratio, which helps improve your credit score. Some secured cards offer this automatically if a certain number of payments are made on time. Others don’t.
- Can you get your deposit back? Review the requirements for getting your deposit back and how long it will take to get it back from the issuer.
“Not all secured credit cards are created equal. It’s crucial to choose one with minimal fees and to be aware of the interest rates. As with any financial tool, the key is to be informed and proactive,” says Kovar.
How to rebuild your credit with a secured credit card
Here are some tips for rebuilding your credit score using a secured card:
- Choose the right card: Find a card with reasonable fees and a low-interest rate. Ensure they report your payment activity to the major credit bureaus, which is crucial for rebuilding credit.
- Make payments on time: Payment history significantly affects your credit score. Pay your credit card bill on time, every time. Late payments can harm your credit score, so set up reminders or automatic payments to stay on track.
- Pay in full: Not only does this help you avoid unnecessary interest charges, but it also shows responsible credit management.
- Keep credit utilization low: Your credit utilization ratio, the amount of credit you use compared to your credit limit, plays a crucial role in your score. Aim to keep your credit utilization below 30%. For example, if your credit limit is $500, keep your balance below $150.
- Review your credit regularly: Look for any errors or discrepancies and report them to the credit bureaus.
- Be patient: Rebuilding credit takes time and consistent effort. Stick to responsible credit habits; over time, you will see positive changes in your credit score.
The bottom line
A secured credit card opens the doors for many borrowers who previously felt shut out. If you can foot the deposit, you can start building your credit history, one payment at a time.
“A secured credit card is like a financial training wheel. It provides an opportunity to practice good credit habits in a controlled environment. And with consistent effort, it can pave the way for better financial opportunities in the future,” says Kovar.
Since credit history improves with time, it helps to get started sooner rather than later. Take proactive steps to rebuild your credit and see if a secured credit card makes sense.
Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.