If you’re just starting out on your own or starting over financially, a secured credit card can give you the convenience of credit and debit cards, while helping you build a solid financial history. In addition to improving your creditworthiness, secured cards can help you establish good financial habits that will serve you well for years to come.
Step one: Understand the difference In many ways, secured credit cards are just like other credit cards. They give you the same ability to do things like rent a car or reserve a hotel room online with ease. They can offer the same benefits, such as purchase protection or cash rewards. And just as when you apply for other credit cards, the secured card issuer will run a credit check to see how you’ve handled your bills or if you’ve declared bankruptcy within the past year.
Once you’re approved, however, there’s a different process for establishing your credit limit. You’ll pay a cash deposit to the card issuer—usually a minimum of $200 to $500—and your credit limit will equal that deposit. The issuer then holds, as collateral, your deposit in a savings account that will pay you interest.
“This is different from a debit card or prepaid card, which both start with a set balance that you withdraw money from,” says Ruth Susswein, deputy director of national priorities for Consumer Action, a national nonprofit consumer-rights organization based in San Francisco. “With a secured credit card, you won’t have access to your deposit. It’s there to give the bank security that you will pay the bill when it comes due every month.”
Step two: Make the most of your card Since your payment history accounts for one-third of your credit score, you’ll want to be diligent in paying off your secured credit card balance in full, on time, every month. Not only does it help your credit score, but it saves you interest charges that would apply to any balance that’s carried over from month to month.
Also, make sure that your card issuer regularly reports your payment history to the three major credit bureaus. “That means there will be a record that shows you have access to credit and make your payments responsibly,” Susswein says. “That is what will give others confidence to lend you money in the future.”
Step three: Enjoy the rewards of good financial management After you’ve managed your secured card wisely for 12 to 15 months, card offers will likely start appearing in your mailbox. Your issuer may even offer to switch you over automatically. When you make the switch, keep the good habits you established with your secured card going. Remember that any balance you carry over from month to month will be charged interest and if you carry a balance higher than 30 percent of your card limit, it can begin to affect your credit score. The best thing you can do is to pay your bill on time every month, paying off the balance in full if possible.
After you close your secured card, you’ll get back your deposit—with interest—and get on your way to an even brighter financial future.
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