There’s an old adage that says you need credit in order to get credit – and it’s true. It’s also not enough to have credit cards, untouched, burning the proverbial hole in your wallet. You have to use your existing credit – consistently and intelligently – in order to get more credit.
There is a way to beat the system, however. No, we’re not talking about creating an alternate identity or forgery or anything like that. There is a completely legal, legitimate way to begin building (or re-building) your credit. It’s called using secured credit cards
What are Secured Credit Cards?
Secured credit cards are revolving lines of credit, where you have the cash to back up your debt. In other words, you deposit $500 into the credit card account, and can then use the credit card to charge up to $500 (give or take, when you factor in fees).
Important Note About Payments:
Your security deposit will only be applied if you fail to make a payment. At which point, you will also incur interest charges, late fees, and negatives marks on your credit report.
So do not ever forget to make your monthly payment.
Finding a Secured Credit Card
Most secured cards have annual fees. Shop around for the best interest rate and lowest annual fee. You might even find a card with a 0% APR. Some secured credit cards offer a credit limit of up to $10,000 – assuming you have the cash to back that up. This type of credit limit may be good for someone with liquid assets who has just never taken time to build credit.
Most people with poor credit, however, are just starting out in building a financial secure future. A secured credit card with a limit of $200 to $1000 is probably more than enough. Remember, you still have to make your payments every month.
Editor’s Note: For our current recommendations for secured credit cards, check out our Guide to Secured Credit Cards. The Guide is updated periodically.
Some features to look for in a secured credit card include:
- Low or 0 % APR
- Low or no annual fee
- No monthly fees or “insurance charges”
- Reports payments to all three credit agencies monthly
This last aspect is very important. Your timely payments must be reported to the credit bureaus if you want to build your credit and eventually qualify for an unsecured credit card or other type of loans, including a mortgage or car loan.
Additionally, you may want a card that:
- Requires no income check or credit check to qualify
- Permits cash advances through an ATM
- Promises guaranteed approval
Editor’s Note: For current recommendations for secured credit cards, please see our Guide to Secured Credit Cards.
What to Look Out for When Shopping for a Secured Credit Card
Companies know that people shopping for a secured credit card may be desperate for credit – and some unscrupulous companies take advantage of their customers. Stay away from cards with:
- Excessively high annual fees
- Poor customer service – Just because you have a low credit score, or no credit, doesn’t mean you shouldn’t be treated with respect.
- Hidden fees or “insurance” charges
Some cards may zap you with so many fees that, out of your $200 security deposit, you’re left with less than half of that amount to actually charge.
Begin Building Your Credit
Once you’ve applied for your card – and been approved – you can start re-building your credit. Just having the card won’t do much for your credit score. Instead, use the card and then make at least the minimum payment each month.
Concerned about digging yourself into debt? Don’t worry, since you cannot charge more than your credit limit – which is secured.
Some people unaccustomed to using credit may be tempted to pay only the minimum each month. But you’ll build up your credit faster by paying a little bit more than the minimum each month. Even better – pay the balance in full each month.
Even if you’re paying interest, don’t be concerned if you carry a balance for a month or two. It’s costing you a bit of money, but it’s helping to build your credit score. And that’s your long-term goal.
Credit cards offer tremendous benefits. It’s difficult to rent a car, book a hotel room, or shop online without a credit card. Additionally, better cards provide perks such as warranty protection, cash rewards, and special offers.
By starting with a secured credit card, you can begin to build a strong financial future. If you make timely payments, some secured credit card companies will even increase your credit limit without asking for a larger deposit. As your credit score rises, they may convert your card into an “unsecured” card. It’s a safe and easy way to build your credit.