How to Use Secured Credit Cards to Rebuild Your Credit

If you have bad credit, you probably know from personal experience just how difficult it can be to get approved for a loan or even a credit card. Bad credit closes many financial doors. But did you know that you can not only get a credit card with bad credit, but you can also use it to help rebuild your credit?

Secured credit cards give many sub-prime borrowers access to credit that they need, but can’t get through traditional means. Anyone can get approved for a secured credit card because these cards pose no risk to the card issuer. The credit limit is secured when the borrower deposits a certain amount of money into a bank account. This account is left alone unless the borrower defaults on their card payment, in which case the funds are used to cover the outstanding balance.

The amount of the required security deposit varies. Some credit cards require a minimum deposit of $200, while others require $1,000. The credit limit will be equal to the amount deposited in the security account.

When you choose a secured credit card, it’s important to make sure that the card issuer will report timely payments to the major credit bureaus. If they don’t, your credit won’t reap the benefits of your responsible habits. Once you’ve established that your repayments will be reported, make your payments a priority. Use the credit card for small purchases, and pay off the balance in full at the end of the month. If you do this for six months to a year, your credit score will improve and the card issuer might raise your credit limit.

Like other sub-prime financing products, secured credit cards can come with hefty fees and interest rates. These high fees reflect the amount of risk the lender is taking by giving the borrower a credit card. Some of these cards can have truly predatory terms, so always be certain of what you’re agreeing to before you become a card holder. Never pay more to open an account than you will receive as a credit limit. Don’t agree to terms over the phone; get a printed cardholder agreement that you can read for yourself, and don’t sign it until you understand the conditions.

Luckily, there is pending legislation that will limit so-called “fee harvesting” credit cards – those that subject the card holder to exorbitant fees without giving them a significant amount of credit. If you have suspicions about a secured card issuer’s ethics, move on to another source to avoid getting gouged.