Improve Your Credit Score with a Secured Credit Card

If your credit has seen better days and you’ve been turned down for an unsecured credit card, you need to know about secured credit cards.

Many people don’t know what a secured credit card is, or how it works. After all, with so many types of cards on the market these days—reloadable prepaid cards, debit cards, gift cards, cash back cards, balance transfer cards, student cards—it can be hard to keep track of what card does what.

But for people who have poor credit and want to improve it, secured cards are an important type of credit card. Here’s why: to improve your credit, you need to show that you can use credit responsibly. But when your credit is bad, it can be difficult to be approved for a regular credit card. This leaves people with bad credit in a tricky spot. A secured credit card can help get them out of it.

What is a secured credit card?

A secured credit card is a card that is guaranteed by a deposit made by the cardholder when opening the account. The credit issuer is protected from default on the part of the cardholder, because to get the card, applicants must put down a lump sum equal to the amount of credit they are applying for. This acts as collateral for the “loan” the credit issuer is giving by extending a line of credit.

To get a secured card, customers fill out an application and pay an amount between $200 and $2,000. This can be more or less depending on the card, and applicants can choose how much to put down, according to their desired credit limit.

Once they have been approved and received the card, people can use the secured card the same way they would use a regular credit card. Stores, restaurants and any vendor who accepts credit cards will also take secured cards. Secured cards are available from major credit card payment networks including MasterCard, Visa. As long as the merchant accepts the payment network that issues the secured card, it can be used as a method of payment, up to the credit limit.

A statement is issued each month with a payment due date, and people can pay a minimum amount due or the balance in full. Secured cards do tend to carry higher interest rates than unsecured credit cards, so it’s a good idea to pay the balance off each month and avoid carrying a balance from month to month.

Prepaid cards and secured cards: what’s the difference?

Like a prepaid card, a secured card is opened using an up-front payment from the customer, and the amount paid by the applicant is equal to the amount of credit available on the card. But that’s where the similarity ends.

With a prepaid card, people actually use the funds they loaded onto the card to make purchases. There is no bill to be paid each month. It’s like exchanging cash for a card, then using the card until the money is gone—and putting more on it.

With secured cards, the initial deposit stays with the credit card issuer as collateral. When people use their card to make purchases, they must pay them off each month. This benefits them because their payment history is reported to credit bureaus, which in turn can impact credit.

Prepaid cards do not affect credit scores or history. Secured cards, on the other hand, are a great way for people with poor credit to improve their credit scores.