What is a secured credit card?

A secured credit card is where you pay a bank an amount of money, say $500 and receive a credit card with a $500 limit on it. You use the credit card in exactly the same way as any other credit card and make regular monthly payments to pay off any money that you spend using the card.

The credit card is secured against the money you have in the bank so there is no risk for the lender because they simply take this balance if you don’t pay the 

balance on your credit card. Most banks will even give you interest on the initial payment you make to secure the credit card.

How this helps to build credit:

This is a great way for people with bad credit to build up their good credit. Firstly there is no risk for the bank so there should be no problem in them giving you a secured credit card.

Secondly if you are making regular and consistent repayments on your card then you are building a positive credit history on you credit report that shows you consistently pay off your debts.

What to watch out for:

You must repay your monthly amounts without fail or you’ll just be damaging your credit more. Also make sure you don’t go over your limit on purchases. This can be easy to do because secured credit cards do not allow large credit limits.

Secured credit cards don’t make a big financial impact on repaying interest rates because at the low credit limits, even with high interest rates your repayment interest will be low.

Many secured credit cards will be free to open, so be wary if a company offers you low interest rates but a high annual fee or start-up costs.

Building good credit

If you use your secured credit card often and make regular payments then you will build a thread of good credit history. After a year or so you can apply for other credit, such as a non-secured credit card. If you manage this properly too then you are well on the way to establishing good credit. But remember that you must avoid penalties for late payment.

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Copyright 2008

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