Here’s some bad news: If you have poor credit or no credit history at all, you might have trouble getting approved for a new apartment, taking out a loan or even getting a job.
With a poor credit history, it’s also hard — if not downright impossible — to qualify for traditional unsecured credit cards.
But here’s some good news: A secured credit card can help you build credit or rebuild your credit, although this type of card does come with some drawbacks.
A secured credit card is like a credit card with training wheels. It gives you the convenience and ease of using plastic, without many of the risks of a traditional unsecured card.
Designed for those with no credit or who need to rebuild their credit, a secured credit card requires you to put down a security deposit with the card issuer. In most cases, the deposit acts as your credit limit on the card. For example, if you put down a $500 deposit, you can spend up to $500. After you hit that limit, you won’t be able to use the card again until you make a payment and reduce your balance.
If you make payments on time, the credit card issuer might increase your credit limit without requiring you to make an additional deposit, giving you more spending power.
How much you need to deposit depends on the credit card issuer. In some cases, you can put down a deposit as small as $49, while other card issuers require an initial deposit of at least $500.
Unlike debit cards or prepaid cards, secured credit cards function like other credit cards. That means the card issuer will report your payment history to the three major credit bureaus: Experian, Equifax and TransUnion. If you make all of your payments on time, a secured credit card can help you improve your credit.
When you don’t qualify for a traditional credit card, you might rely on prepaid debit cards to pay for your purchases. While they’re convenient, prepaid debit cards are not as valuable as secured credit cards.
When you make a purchase with a prepaid card, you’re using your own money to make purchases, rather than borrowing money. Because there’s no credit use, the prepaid debit card issuer doesn’t report your activity to the credit bureaus, so a prepaid debit card can’t help you establish good credit. If you’re looking to improve your credit score, you’ll need a secured credit card rather than a prepaid debit card.
While secured credit cards are a smart choice if you’re trying to build your credit line, getting approved for one is not guaranteed. When you apply for a card, the issuer will perform a credit check. If you have a history of missed payments or bankruptcy, the issuer might reject your application.
In some cases, you might be more likely to qualify for a secured credit card if you have a checking or savings account with the bank that stands behind the card. For example, if you have a Capital One checking account, you could be more likely to get approved for a secured credit card from Capital One.
Secured credit cards can be a great tool for those new to credit cards or those who need a fresh start. However, there are some drawbacks you should keep in mind before submitting your application.
As your credit history improves, you might consider switching to an unsecured credit card. Unlike secured credit cards, which require a deposit, unsecured credit cards do not. Instead, the credit card issuer offers what’s known as a revolving line of credit. Because you’re not withdrawing money from your bank account to open a card, unsecured credit cards offer more flexibility and spending power.
Unsecured credit cards tend to have lower interest rates than secured credit cards. And they offer benefits and rewards that you might not receive with secured cards. For example, you could earn cash back on routine spending or qualify for extended warranties on your purchases.
If used strategically, a secured credit card can be an excellent way to build or rebuild your bad credit, boost your credit score and establish good habits. Use the card sparingly, make all of your monthly payments on time and monitor your credit so you can reap the rewards from responsible use.
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