Debt Management

Are secured credit cards a good way to improve your credit?

This guest post was written by Jason Bushey. Jason runs the day to day operations at Creditnet.com.

If you don’t have a secured credit card, then you’re forgiven if you don’t even know what a secured credit card is. However, if you have bad credit and you’re having trouble getting approved for a credit card – even those cards made specifically for consumers with bad credit – then you should absolutely learn about the benefits of secured credit cards.

Why? Because secured credit cards are a great way to rebuild your credit. And in some cases, they might be one of the only ways to re-establish your credit history and dig you out of the hole that is bad credit. 

Secured credit cards are credit cards that require a security deposit. Essentially, you’re guaranteeing your credit line by putting up your own money in case you default. Depending on the credit card issuer, your credit line is 70% to 100% of your security deposit. These credit cards are for consumers with especially bad credit, or no credit at all. 

We know what you’re thinking (we think) – ‘This sounds like a prepaid debit card.’ 

Sure, they’re a little similar. However, there are a couple of significant differences between prepaid debit cards and secured credit cards, the biggest being that you can rebuild your credit with a secured credit card. 

That’s right, secured credit cards are a great way to rebuild your credit. Debit cards? Not so much… 

Here’s the deal; secured credit cards report directly to the three major credit bureaus, and in many cases they offer free credit monitoring so that you can watch your score improve with every month that goes by. 

Also, as your credit improves, some secured credit issuers will extend your credit line beyond your security deposit. And after a year or so of responsible spending and improved credit, odds are that very same issuer will approve you for an unsecured credit card, which will improve your credit that much more assuming you keep paying your bill on time every month. 

Again, these are the major differences between secured credit cards and prepaid debit cards: secured credit cards report to the major credit bureaus, and you’re working off an actual credit line (versus your own money). Thus, you can improve and rebuild your credit with a secured credit card. 

To be honest, there’s no other reason to carry a secured credit card other than to establish or rebuild your credit. This is what they were invented to do, and the result is the near-equivalent of a lifesaver when it comes to building credit or rebounding from past financial mistakes. 

It can be tough to get out of a deep credit hole, especially when you’re at the point in which the only credit cards willing to lend to you charge absurd interest rates. With secured credit cards, issuers have essentially nothing to lose when they approve you, and your annual fees are put towards some really helpful credit building tools like the aforementioned monthly credit monitoring. 

Prepaid debit cards, on the other hand, are quite the opposite. Don’t let prepaid debit card offers fool you – you really can’t build credit with a prepaid card. They may report to a credit bureau, but odds are they aren’t the ones that are going to help you in any significant way. 

So as you put together your plan to rebuild credit, you should strong consider applying to a secured credit card. Yes, the security deposit you have to put up could set you back a couple weeks, but the amount of money you’ll save on interest fees later thanks to your improved credit will be well worth it. 

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