The first step to rebuilding your credit – Secured Credit Cards

Is bad credit keeping you from accessing new credit? It's a vicious cycle, but for those of you who want to rebuild your poor credit rating or are building your credit history for the first time, getting a secured card might be your best (or only) option.

Is a secured credit card right for me?

The biggest difference between a secured and an unsecured credit card is that secured cards require a security deposit from the cardholder, which functions as cash collateral against you defaulting on your payments.

Secured credit cards are especially useful for consumers with poor or little to no credit history that are typically declined for unsecured credit cards. A secured card guarantees approval by the lending institution because, in effect, you are the one taking on the financial risk through your security deposit.

Think of a secured card as your credit line "training wheels" that allow you the benefits of owning a credit card while giving you the opportunity to build a history of responsible credit use with on-time payments. The small credit limits and security deposit requirements are there to protect you from getting yourself into the poor payment history that may have plagued you in the past.

Secured card credit limits are often set at the amount of the security deposit or some percentage of it so that you cannot charge more than your security deposit can cover. However, depending on your specific secured card, adding more to your security deposit enables you to access a higher credit limit, or if your payments are on-time and consistent, the credit card company may reward you by increasing your credit line without requiring additional deposits. Many secured cards increase the credit limit of your secured card after 6-12 months of responsible use and on-time payments.

If you can't break yourself from old habits and your monthly payments for credit charges are late or insufficient, the bank or card company will dip into your security deposit to foot the bill. Only good news here is that because of the small credit limit, you probably cannot get into significant debt.

Putting the secured card to work for you

A secured credit card is a great vehicle to build or rebuild your credit history, but still requires regular responsible use and diligence to earn good credit standing. Some guidelines to optimize your credit with secured credit cards:

• Make payments on time - Always, always pay on-time to put your best credit foot forward. Your card is intended to build positive credit history so don't bite off more than you can chew, don't charge purchases you can't afford to pay, and to show your serious commitment to being credit-worthy, never miss a payment.
• Use your card, responsibly – To build up a credit history, you're going to need to use your secured credit card. Using it once a month for something simple like a tank of gas or a small grocery run is a great way to demonstrate responsible use while building payment history. Most importantly, pay on-time when the bill comes - it's one of the largest influences on your credit score.

Secured credit cards can be a very powerful tool to start improving your credit today, but there are drawbacks. Secured cards come with fees of all kinds including annual membership fees, application fees, processing fees, deposit fees, higher interest rates fees, late payment fees, over limit fees, and cash advance fees.

We have two Credit Karma Recommended cards in the pre-paid/secure card category. The Public Saving Visa is a good card with no annual fee and reports your credit activity to all three credit bureaus. Also, the AccountNow card has low fees and the opportunity to link with your direct deposit, though this will not report to the credit bureaus and thus won't be considered in your credit scoring.

Secured card: the path to greater options

A secured credit card can be a significant stepping stone in managing your credit health. There are many secured cards out there, so shop wisely, read the fine print, and - as always - use the card responsibly and pay on-time.

Good credit is somewhere in your future, but improvements to your credit score don't happen overnight. You'll need to show months and possibly a couple years of solid credit history before you'll be ready to graduate to an unsecured credit card. But have hope; there is light at the end of the tunnel.

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