What Is a Secured Credit Card?
A secured credit card works just like a regular credit card. You swipe your card to make purchases that deduct from your credit limit. You repay the balance with monthly payments or all at once. The major difference with a secured credit card is that you’re required to make a deposit against the credit limit on the account. The security deposit is collateral held in case you default on credit card payments. A secured credit card’s credit limit depends on the security deposit you make. For example, if you make a $500 deposit for a secured card, your credit limit will usually be $500, although it depends on the lender and the card.
Use Secured Credit to Change Your Credit History
Most bad credit comes as a result of poor payment history. You can demonstrate better payment habits, even when you can’t get credit the traditional way, by getting a secured credit card. You can’t prove a renewed ability to make timely payments until you have a new credit card. After you’ve been approved, remember that your purpose for the new secured credit card is to build a positive credit history. That said, don’t use the card to create debt. Instead, use your secured credit card to make small purchases that you can pay in full each month. If you can’t afford to pay for a purchase, don’t charge it.
Transitioning to Unsecured Credit
Many credit card companies convert your secured credit card to an unsecured card after one or two years of timely payments. Even if you can’t convert your secured credit card, you may get approved for an unsecured credit card with another creditor after 12 months of on-time payments.
