Poor credit can be hard to repair because you have to use credit to do so. Secured credit cards may offer a solution by providing you with credit when you need it and allowing you to build better credit through timely payments and responsible use. Secured credit cards have higher interest rates than unsecured cards, so shop around to find the lowest rates before you decide which card is right for you.
What is a Secured Credit Card?
A secured credit card requires you to make a deposit into an account. The deposit is held as security in case you default on payments. This makes it less risky for a company to offer a credit card to people with poor credit. This deposit is not drawn on when you use your card; instead, the company issues you a line of credit. With good credit management, you rebuild your credit and when you graduate to an unsecured card, you get back all or most of your deposit.
Interest Rates
Although secured credit cards generally have a higher interest rate than unsecured credit cards, their interest rates still vary among companies. However, don't worry too much about the interest rate. Interest rates apply to your balance and can start to rack up over time, but to improve your credit you don't want to carry a balance for any length of time. Keeping a balance and accruing high interest defeats the purpose of having a secured card. The best way to rebuild credit is to make small purchases with your card and then pay off balances every month.
Close-out Conditions and Options
The purpose of a secured card is to rebuild credit. Once you've done that, you want to switch to an unsecured credit card that will likely have a lower interest rate and better terms, and that allows you to get back your deposit. Some secured cards can become unsecured if you manage your credit well. Others have conditions on how much of a balance you can carry when it comes time to close out your account or they may retain your deposit for a few billing cycles to be sure the card is paid off.
Choosing the Right Card
Choose a card that reports to all three major credit bureaus. You can't rebuild your credit with a secured card unless it shows how financially responsible you are. Also, before applying for a card, check to see whether your deposit goes into an FDIC-insured account. This protects your deposit until you close out your secured card and can help weed out potential scams. Do your homework on companies before you apply.
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