Building your credit with a secured credit card

Are you looking to establish or rebuild your credit? If so, you’ll need the right financial tools to achieve your goal. Good news: A secured credit card can help you establish or re-establish the credit you need. Here’s the full scoop on using secured credit cards to build credit.

What is a secured credit card?

A secured credit card uses money you place in a security deposit account as collateral. Your credit line is based on your income, ability to pay and the amount of your cash collateral deposit. For example, if you put $1,000 into the deposit account, your available credit line will be $1,000 if you have sufficient income and can demonstrate your ability to pay. (Note that a secured credit card is not the same thing as a prepaid card. Your initial deposit is simply collateral and doesn’t count toward payments.) A security deposit gives lenders the confidence that you will pay them back, even if you have damaged credit or no credit history.

How do secured credit cards work?

A secured credit card works just like a traditional credit card. That means you can use it for everyday purchases as well as for transactions where cash or debit cards aren’t accepted (like reserving a hotel room or paying for a car rental).

A secured credit card can help you build or re-establish your credit. However, if you default on your payments, the card issuer may keep your deposit. This means that making your monthly payments on time is just as crucial with a secured credit card as with a traditional card.

Most secured cards are reviewed periodically. If the review is successful, you may qualify to move to an unsecured credit card and receive a refund of your collateral deposit. Eventually, responsible credit behavior could help you qualify for lower interest rates on mortgages, cars or other big-ticket items. When handled properly, using a secured credit card to help build or rebuild your credit can demonstrate to your credit card issuer and to the credit reporting agencies that you are a responsible consumer who uses credit wisely.