Things You Need To Know About Secured Credit Card

What is a Secured Credit Card?

A secured credit card is backed by a cash deposit you make when you open the account. The deposit is usually equal to your credit limit, so if you deposit $200, you'll have a $200 limit.

The deposit reduces the risk to the credit card issuer: If you don't pay your bill, the issuer can take the money from your deposit. That's why these cards are available to people with bad credit or no credit.

What happens to that $200 deposit if you always pay your bill on time? You'll eventually get it back. Use the card responsibly, and you can improve your credit enough to qualify for an unsecured card that doesn't require a deposit.

Some of the best-secured cards may allow you to upgrade your account directly to an unsecured card. Others don't have an upgrade process, so you'll have to apply elsewhere, then close the secured card. When you upgrade or close a non-delinquent secured card, the issuer refunds your deposit.

The minimum and maximum amount you can deposit varies by card, but you should be prepared to come up with at least $200 for a secured card deposit.

How to Use a Secured Card Effectively

Although they require a deposit, secured credit cards are a powerful tool for rebuilding credit. Here's how to use one most effectively:

Use the card sparingly, making only one or two small purchases every month

Pay your balance in full every month before the due date. When you pay in full, you won't be charged interest. Interest rates on secured cards are generally higher than those on unsecured cards.

Keep an eye on your credit score over time; when it has meaningfully improved, ask your issuer about upgrading to an unsecured card

You Still Have to Make Payments

Even though your credit limit is secured with a deposit, you're still required to make regular minimum payments on your balance. Any late payments will be reported to the credit bureau and will hurt your credit score. If you default on the credit card by falling several months behind on your payments, your account will be closed and you'll lose your security deposit.

Who Benefits From a Secured Credit Card

Regular credit cards have stricter credit qualifications that it hard for people with bad credit and no credit to be approved for these cards. Consumers who have trouble getting approved for traditional credit cards often get approved for a secured credit card much easier than a regular credit card. Getting a secured credit card is an opportunity to prove you can use credit cards responsibly. After a few months, you have a better chance of getting approved for regular credit cards.

Even people with good credit - those who don't have trouble getting approved for regular credit cards - can benefit from a secured credit card. For example, you may want a bigger credit limit than you can be approved for. Making a security deposit of $5,000 or even $10,000 would give you a bigger credit limit and make it easier to get approved for similar credit limits on an unsecured credit card.