No one’s financial life is perfect. Even Donald Trump declared bankruptcy and Warren Buffett has made investing goofs, so there’s no shame in having less than perfect credit. There’s also no reason to let your bad credit last for long when there’s an easy and virtually free way to rebuild your credit with little hassle and just a little foresight.
So, how do you do it? Easy—secured credit cards.
Secured Credit Cards Explained
Usually, credit cards are given to customers who are given a fixed limit that they can then charge on the card, and either pay off the balance within a month or over time with fixed payments and interest charges on top. These are known as “unsecured” lines of credit, because there is no security, or collateral, that the bank has in case you don’t pay your credit card. (If you don’t you run the risk of a lawsuit against you, wage garnishment, and a ruined credit score.) In this way credit cards are different from mortgages (where the house is the collateral) or a car loan (where the car is the collateral).
Secured credit cards are different. Instead of giving you a credit card based on your creditworthiness, which is usually calculated by looking at your credit score, banks will issue a secured credit card after you deposit a certain amount of money in a restricted account.
For example,say you want a secured credit card with a $1,000 limit. For a 100% secured credit card, you’ll need to deposit $1,000 in an account with the card issuer. This ensures that the bank has a guarantee against defaults—if you don’t pay your credit card debt, the bank just keeps the money in that account until you do. Of course, if you pay the credit card you can get your money back if you request it—but the bank may then cancel your secured credit card.
This makes secured credit cards virtually risk free for banks, but what’s in it for you?
Benefits of Secured Credit Cards
People who have limited or bad credit will often get secured credit cards as a way of building up their credit scores. Since issuers of secured credit cards report the activity of cardholders to the major credit bureaus, a secured credit card is a way for you to build up a good credit history that, over time, will improve your credit.
This positive impact on a credit history is the main reason why most people bother with secured credit cards.
There are other benefits, too. Some secured credit cards offer rewards like points or airline miles, much like their unsecured cousins.
Also, it has become more common for card issuers to offer partly-secured credit cards to cardmembers who stay in good standing with a secured card for a while. For instance, if you have that $1,000 secured credit card for a couple months, you can call the bank and ask them to free up some of the money securing the card. If they say yes, they will release some portion—perhaps $200 of the initial $1,000 deposit—and keep your credit limit at $1,000. Over time, a secure credit card can turn into an unsecured card as the card issuer builds a relationship with the bank. Many card issuers will do this.
Dangers and Risks with Secured Credit Cards
Not all secured credit cards are a good thing, though. Some banks and card issuers frankly prey on people who don’t know any better. With secured cards, they do this by charging enormous fees for opening and maintaining the card.
Avoid this risk. Many card issuers will give secured credit cards with no fees, so check to make sure if there is any charge up front or during the duration of the account. If so, look elsewhere.
Where to Get a Secured Credit Card