A secured credit card is a credit card used against a balance that you have deposited. For example, you would deposit an amount into a bank, or with a credit card company, (this can sometimes be as low as $100), and then the amount that you deposited would be your credit limit on the credit card. In essence, it is a secured loan.
At first, it may seem like secured credit cards don't really serve any purpose as you are still just spending your own money, but secured credit cards are a great way to establish your credit if you have none or your credit is too shabby to be eligible for other forms of credit.
Build Up Your Credit
Once you have received your credit card, you should begin charging small amounts to it, and then once the bills come in, pay them right away. It is better if you pay the amount in full every month instead of letting it build up. You should do this for a few months until you begin to build a positive credit history. It's not an immediate process; it might take up to several months for these marks to show up on your credit report. For each "paid on time" mark on your secured credit card, it's one step closer to getting a good credit rating.
Note that some people will tell you that you need to keep a balance on your credit cards in order for them to count positively towards your credit. However, I have never actually seen this proven.
After you have established a history of paying on time, you will be able to apply for credit elsewhere and not have to use the secured method. But keep in mind that too many credit applications can hurt your credit report just as much as a late payment mark, so be careful that you don't simply apply to every offer that comes along. Instead, be selective and carefully analyze each one to make sure that they are offering you a fair deal.
The Positives and Negatives
As in any other credit repair tool, a secured credit card has its positives and negatives. For starters, even though you are securing the credit card with your own money, you will still have to pay an interest rate to the card issuer. (These rates vary, so be sure to shop around for the best one!) Because of this, it's important that you don't let a balance build up, because by doing so, you could quickly find yourself up to your ears in debt again. Instead, look at the card as a credit repair tool, and not as a way to purchase goods with funds you don't currently have.
On the upside, a secured credit card is a great way to build your credit. If you have had too many bad marks on your credit report, it will be difficult, if not impossible, to find someone who will be willing to take a chance and extend you credit. For many people, this means living a life using only cash, which in today's society, is nearly impossible. A secured credit card offers you a chance to prove to lenders that, even though you made some mistakes in the past, you have realized your errors and want to start anew.
Summary
- A secured credit card is one that requires you to pre-pay for your use of the card
- A secured credit card is a good way to (re)build credit
- It still takes time to build up credit using the secured card method
- You still pay interest on secured cards, so be careful not to let your balance build up
