How Secured Credit Cards Can Help Your Credit

If you are applying for your first credit card or have a short or poor credit history, obtaining one isn't going to be easy. Those looking to get their first card will find they need credit to get credit, and those with poor credit may be refused at certain interest rates. One way of entering the magic circle is to obtain a secured credit card. Here's the scoop on how doing that can help you build credit.

Secured Credit Cards

While it’s possible to live in the modern world without a credit card, it is not convenient. You can't reserve a plane ticket without that little piece of plastic, and good luck renting a car.

If you've applied for a credit card but were denied due to lack of a credit history or a poor credit history, you can get your foot in the door with a secured credit card.

Ins and Outs of Secured Cards

It looks like an ordinary credit card, but a secured credit card is a little different. You are obligated to deposit money into a locked account to repay your balance, in case you don't make your regular payments.

For example, if you put $300 into a secured deposit account, you can charge up to $300 on the card. Sometimes you can add money to the account to obtain a higher credit limit.

Benefits of a Secured Credit Card

The best part about a secured credit card is that it helps increase your credit score. If you have no credit when you start and you pay your bill responsibly, you might hit a 750 credit score within six months. It will take longer if you've got a lower credit score, but you'll still get there over time. The key to raising your credit score with a secured credit card is to make sure the issuer of the card reports your timely payments to the three credit bureaus.

Generally, after you've held the secured card for a year and paid your bills on time, the bank or card issuer will release your deposit account and convert your card to a regular credit card.

Downsides of a Secured Credit Card

Secured credit cards are better than no credit cards, but they do have some disadvantages. Fees can be high, so shop around and try to find a card that doesn't charge an application fee or annual fee. Read the fine print – some secured card issuers charge for making ATM withdrawals, and most charge for late payments.

Another disadvantage to secured credit cards is that the limits are usually quite low. You can't really do much with $300 credit. But if you wait out the time, you can build up your credit and get approved for a higher-limit, unsecured credit card.

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