Positive Credit Through Secured Credit Cards

People often ask me how they can improve their credit after bankruptcy or a history of unpaid bills. The first and most important thing is to always pay your bills on time. But the next best way is to establish a positive credit history using a secured credit card.

How it Works

A secured credit card is backed up by your money. Along with your application for the credit card, you also send a deposit which acts as the security for the loan in case you do not make your payments. The deposit amounts vary between $200 and $5,000 depending on the card company. The deposit makes lenders more willing to extend credit because they know if you do not pay, they get to keep the money. The amount of the deposit is typically equal to your credit limit.

Each month, as you use the card and make payments on your account, that information is reported to the credit bureaus. Your deposit remains in a savings, money market or CD account for a specified period of time while you build your credit history.  

What to Look for

  • Does the credit company report to all three of the credit reporting agencies? Some secured credit card providers do not report to the credit bureaus. If they do not report it will not help you establish positive information in your report.
  • Fees. There are several different types of fees you want to be aware of on credit cards.
    • Annual fee – if the card has an annual fee it will typically be between $20 and $50.
    • Application or processing fee – if the card has an application or processing fee (fee just to apply) it is typically $50 or less.
    • Late fee – will vary depending on the amount owed on the card. Of course, you never want to pay late, though.
    • Deposit terms – as stated above, you have to deposit a certain amount of money into an account with the credit card company. The amount of the deposit determines the credit limit on the card.  There are four things you need to know:
      • How long before you earn your deposit back (the card becomes unsecured)?
      • What happens to the money you deposit? Where will it be held (savings account, money market account, CD) and will you earn interest on the money while it is held?
      •  Is there a specific amount of time you must leave the money in if you decide to cancel the card? Some companies require the money be held for a minimum of two to six months in order to cover any fees.

Using the Card

  • Limited use and excellent payment history is the key to building credit with a credit card. Charge a very small amount each month and pay it off in full. Do not keep a balance. I know some sites purport that you have to maintain a balance in order to build credit – that is simply not correct.

Where to Look

The first and best place to look for a secured credit card is at your own bank. If you trust them and have a good relationship them, start there. Otherwise, there are two websites that list secured cards: www.bankrate.com and www.creditcard.com. On the sites you can compare the rates and features of several different cards.

Remember to comparison shop. Not all offers will be created equal. While credit cards can be the quickest and easiest way to rebuild credit they are also the quickest and easiest way to ruin credit.  If you run into trouble with your credit card or other bills, talk to a certified financial counselor. They have options to help you such as budgeting tools, debt management plans, debt consolidation alternatives and more.