How to Get the Most Out of Your Secured Credit Card

By Mikey Rox. Last updated 16 April 2015. 0 comments

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If you're jump-starting your credit history or rebuilding bad credit, there's nothing more frustrating than hitting a brick wall. You need credit to build credit — one of life's super-annoying catch-22s — but when your credit history is nonexistent or marred by past mistakes, just being approved for a credit card so that you can start over is an uphill battle. But not all hope is lost. A secured credit card can provide the credit you need to establish or fix your credit.

Secured credit cards work just like unsecured cards, with one main difference: you give the bank a security deposit, and the amount of your deposit determines your credit line. These cards are the next best thing if you can't qualify for other credit cards. Here are six ways to maximize your experience with them.

1. Start With a Smaller Credit Line

A secured credit card is by no means a prepaid credit card. The deposit is nothing more than collateral — in case you skip out on payments. You'll receive a monthly statement just like any other credit card, and you're required to make at least the minimum payment each month.

Ultimately, you determine your own credit line. You can give the bank a security deposit as low as $250 and receive a small credit line, or you can give the bank a security deposit of $2,000 and receive a higher credit line. But if you've had self-control problems in the past (and you probably have; that's why you have a secured credit card now), it might be best to start with a low deposit and credit line. Too much available credit might be too tempting, but with a low credit line you won't get in over your head.

2. Make Sure the Bank Reports to the Bureaus

Not every bank issuing a secured credit card reports to the credit bureaus every month. Since you're trying to rebuild or establish credit, it's crucial that the bank updates your credit report with positive activity, such as timely payments.

Read the fine print before applying for a secured credit card or contact the bank and ask how often it reports to the three credit bureaus. Some banks only update credit reports every few months, while other banks never send updates. Ideally, you want to get a secured credit card from a bank that reports activity every single month.

3. Minimize Credit Card Fees

Secured credit cards are helpful, but expensive. They might have an annual fee, which is also typical with some unsecured credit cards. But many secured credit cards also charge monthly maintenance and a setup fee. The bank charges these fees directly to the card, which means the credit card arrives in the mail with a balance — before you make your first transaction. You can't avoid fees, but you can shop around and compare the cost of different secured cards.

4. Choose a Low-Rate Card to Save Money

Don't believe anyone who says every secured credit card features a high interest rate. Yes, some cards have rates significantly higher than unsecured credit cards; this is expected since secured credit cards help individuals who need to build or rebuild their credit. However, some secured credit cards also feature competitive rates. If you know you're going to carry a balance from month-to-month, compare rates before applying to save on interest charges.

5. Only Buy What You Can Afford

A secured credit card can improve your credit history, but only if you use the card responsibly. Timely payments make up 35% of your credit score, so you need to pay your statements on time every month. Since the amount you owe makes up 30% of your credit score, only charge what you can afford and pay off your balance every month. Your spendthrift days are officially over, son.

6. Ask Questions and Know What You're Getting

When it's all said and done, a secured credit card is a steppingstone to an unsecured card. Depending on your bank, you may automatically qualify for an unsecured credit card after 12 to 18 months of timely payments, at which time the bank refunds the security deposit. But, you won't know about this perk unless you ask. Additionally, some banks will increase the credit line on a secured credit card without requiring an additional deposit from a cardholder, and some secured credit cards come with a rewards programs or offer other perks, such as free access to credit reports.

Do you have experience with secured credit cards? How did they help you?

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