In most cases you need to have credit to get credit. But how are you supposed to ever get it if you don’t have it? It’s one of the many catch 22’s of life. Responsible use of a credit card builds a good credit rating. But people who have never had credit or need to repair a poor credit history may not qualify for a regular credit card. A secured credit card is an option available to establish, or re-establish, credit. Here’s the scoop:
A secured credit card is like a regular credit card in that you can use it for everyday purchases as well as transactions where cash is not accepted. But it is more like a debit card because you are not borrowing money rather you are using money that you have put on the card instead of borrowing it. You make a deposit into an account linked to the credit card. The card will have a Visa or MasterCard logo on it, but you will not be able to charge more than the amount you previously deposited onto the card. For example, if you put $500 in the account; you can only charge up to $500.
As you make purchases using the card and pay the monthly bill the credit card company starts to report your account and your status to the three major credit bureaus and ta-da you begin to build credit. That being said it is important that you are diligent about paying your bill on time so you are building good credit, not bad. If you default on your payment some card issuers will actually keep your deposit. It is also important that you choose a reputable secured credit card, as there are companies out there looking to prey on people with low or no credit. Some cards have extremely high interest rates and unreasonable fees.
When looking for a secured credit card you want to stick with a reputable bank and make sure you read all the fine print. To name a few, Capital One, Citi, and Bank of America, all offer secure credit cards. Make sure to look for a card with a low annual fee. Some cards even offer the ability to earn interest on the initial security deposit. Most cards require an initial deposit of at least $300 and charge anywhere between a $25-$35 annual fee.
After six months to a year of responsible use with a secured card, your credit score will improve enough that you may be eligible for an unsecured card. In the long run, by starting to build a good credit score you are opening yourself up to applying for a car loan and even a mortgage.