Will a Secured Credit Card Help My Credit?

Secured credit card issuers require consumers to deposit a specified amount of money into a bank account to open a credit line. The amount of the deposit varies, but cardholders are allowed to charge up to a specified amount based on the amount of cash in their accounts. A secured card's impact on a person's credit rating is largely dictated by how the account is managed.

Credit Reporting

The U.S. Federal Trade Commission recommends that consumers find out before they open an account whether a secured card issuer reports customers' account activity to credit-reporting companies. Your credit scores are based on information in your credit reports maintained by those companies. Therefore, a well-managed secured credit account can't help establish or rebuild a good credit history if the card issuer doesn't report your account activity to credit-reporting companies. It's particularly important that your account activity be reported to the national credit bureaus, which are Equifax, Experian and TransUnion.

Credit Management

Good credit management is the most important factor in determining whether a secured account will improve your credit history. A Bankrate.com article titled "10 Questions Before Getting Secured Credit Cards" recommends charging a few items and paying off your balance each month to establish a good credit history with a secured card. In contrast, a Better Business Bureau article on secured credit cards suggests carrying a balance for several months, while making timely minimum monthly payments to build a positive credit history. In either case, late payments will defeat your efforts to improve your credit rating. Consumer credit-scoring models used by creditors and lenders usually place the most emphasis on whether consumers pay their bills on time.

Secured-Card Restrictions

There are circumstances in which people can't qualify for secured credit accounts. According to the BBB article, most issuers won't approve accounts for consumers who have been convicted of credit-card fraud or who are filing for bankruptcy. Card issuers also may distinguish secured cards from regular credit cards on consumers' credit reports. The Bankrate.com article notes that some consumer advocates assert that distinguishing secured accounts on people's credit reports could hinder their efforts to build a good credit rating. Lenders and creditors could view secured cards on credit reports as a sign of a weak credit history.

Considerations

The FTC warns consumers to watch out for deceptive advertising by some secured card issuers. The FTC says some ads fail to give consumers important information about the cost of application fees, annual fees and interest rates. The required processing fees and account deposit for secured cards can add up to hundreds of dollars. Ensure you understand the total cost associated with a secured card before you apply for an account. The FTC also recommends finding out whether you will receive a refund for all the fees you're required to pay if you're denied a card.