Secured Credit Cards: 101

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It’s easy to say that you’re done with credit cards, but much harder to follow through with that resolution when living in the real, modern world. While we remain firm that it is a much better decision for you to pay for day to day purchases with actual money that’s sitting in your bank account, there are times when only a credit card will do.

For example, making hotel reservations can be next to impossible if you don’t have a credit card. Renting a car or reserving plane tickets can also prove difficult without a credit card, even if you plan to pay for them in cash upon arrival. Add to this list that maintaining a credit card and responsibly paying the balance is a great way to raise your credit score.

So, what’s a person to do if they A) Have a tendency to go overboard when in possession of a credit card, or B) Have recently filed for bankruptcy or had some other financial struggles that are now making it challenging to get approved for a credit card?

It’s true that many credit card companies will not issue a card to borrowers with low credit scores. That’s where the Secured Credit Card comes in.

What is a Secured Credit Card, anyway?

A secured credit card will work just like any other credit card, so you’ll be able to make those hotel, plane and/or car reservations. However, in order for it to work, you must deposit cash into your account first. This makes lenders feel more comfortable issuing you a credit card, and if you prove that you are responsible, your lender may eventually increase your spending limit.

Using a secured credit card can improve your credit score, but it’s important that you choose a company that reports secured card payments to credit bureaus. If your secured credit card payments are going to go unrecognized, the card presents a lot less value to you.

A secured credit card can really help a person with little to no credit history (think recent college graduate) quickly gain a solid credit reputation. Secured cards can also help you if you’ve filed for bankruptcy and have a really rocky financial past; it’ll just take a little longer for you to see your credit score rise.

Now, before you rush out and apply for a secured credit card, there are some things to be on the look-out for. Firstly: outrageous fees. Some companies will take advantage of your desperate need for a credit card and will charge you so many fees it’ll make your head spin. Read the fine print closely, and look for maintenance fees, ATM withdrawal fees, late fees, insufficient funds fees, etc.

Many companies offer really good secured card deals, with reasonable fees. Do your research first, and you should easily be able to find a reputable credit card company willing to provide you with a secured card with terms that you can deal with. Remember: make your payments on time, and only use the card when you absolutely have no other option.

Image credit: Philip Taylor

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