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What is a secured credit card and do you need one?

A secured credit card is like a regular credit card, except for one thing: you have to provide a deposit as collateral before you can use it.

In most cases, the amount of money you deposit represents the limit of your expenditures. So if you deposit $500, then you can spend up to $500.

Unlike pre-paid cards, which allow you to put money on your card and then spend it, the deposit is just there as collateral for the bank—a security that there's always money there to pay off the card. The bank will only draw on your deposit if you fall behind on your payments.

Is a secured card right for me?

Secured credit cards are much easier to qualify for than regular unsecured cards, because of the deposit the bank holds against it. So that makes them a great first step for people who are building—or rebuilding—their credit.

Issuers of secured credit cards will regularly report on your credit activity to the three big credit reporting agencies. That means your good credit behavior, like paying your credit card bills on time, will steadily improve your credit score.

Beyond that, secured cards offer the same convenience as regular credit cards. They make it easier to make in-store purchases; you can use them online and you can say goodbye to carrying your checkbook around.

What things should I consider when shopping for a secured card?

The whole point of getting a secured credit card is to build up a good credit score, so make sure that the issuer reports your credit behavior to the three credit bureaus. Some issuers may also provide benefits, like:

  • Agreeing to increase your credit limit after you begin to make regular payments.
  • Offering competitive interest rates.
  • No annual fee.
  • A deposit refund once you build up your credit score to a certain level.
  • Mobile apps and online payment features.
  • Ways to track your expenses.

How should I use my card?

In addition to offering you convenience and an opportunity to build credit, secured credit cards can also help you develop good credit habits, like:

  • Paying your bills on time.
  • Keeping your balance at less than 30% of the total credit limit.
  • Keeping your credit accounts open for a long time.
  • Not opening a slew of credit cards in a short period of time.

Before you know it, your credit score will start to rise, and you'll be on your way to being eligible for a regular unsecured credit card.