How to Rescue Your Credit With a Secured Card

When your secured card issuer reports on-time payments to the major credit-reporting bureaus, your credit score improves. (iStock)

When you have little credit history or you’re working to rebuild your credit score, a secured card can be one of the best tools you can use to rescue your credit.

A secured card sounds intimidating, but it’s fairly simple to understand. Secured cards are just like credit cards but with one major difference: Rather than getting a credit limit and repaying the bank each month, you have to put a deposit on the card, and that becomes your limit. You use the card like a normal credit card, but your monthly payments go toward paying yourself back. Think of that deposit as collateral. If you stop making payments on your card, the bank will keep it.

The key feature of a secured card is that your secured card issuer will report your on-time payments to the major credit-reporting bureaus. And that’s how you start to rebuild your credit. Not only do you get credit for on-time payments, but if you have a thin credit file – for example, if you recently immigrated to the U.S. or you have never had a credit card before – you’ll officially start your credit history. Age of credit is one of the components that’s used to calculate your credit score, and if you have a longer credit history, it can help your score.

Here’s how to maximize the benefits of a secured card.

Use it frequently but only charge small amounts. When using a secured card, make on-time payments and keep your utilization rate low – that’s how much debt you carry versus your total available credit limit. Those two factors alone make up a significant portion of your credit score, according to FICO. You can simply use the card for one recurring monthly bill and pay it off in full each month.

Monitor your credit report. Consider using a credit-monitoring service that lets you check your report monthly for free. You can also get a free annual credit report from all three bureaus at AnnualCreditReport.com. You should be able to see secured card payments reflected on your report.

Check your credit score. It can be fun to check in and see how your credit improves every few months while you’re using the secured card.

Avoid interest charges by paying in full each month. Secured cards do charge interest, and their rates can be higher than those of some regular credit cards. To avoid getting hit with interest charges, make sure you pay in full each month.

Get ready for the long haul. Credit scores can’t be drastically improved overnight. Be patient and mitigate your expectations. If you are working to rebuild your score and have significant delinquencies on your credit report – or credit dings such as a foreclosure or bankruptcy – those will take time to fall off your report, and a secured card can’t undo that kind of damage completely.

Here’s how to find the right secured card for your needs.

Look for a card with a low deposit amount. Some people may be turned off by secured cards because they need to have cash upfront to open one. Just remind yourself that as long as you use the card responsibly and make all your payments, that money will be yours again. You should, however, ask how long the bank will keep your deposit after you close the secured card as it might not give it back to you right away. Some banks will keep the deposit to cover any charges to the card for a couple of months after you close the account.

Watch out for fees and charges. Secured cards can also come loaded with hidden fees and other charges. One of the most important items to check is whether the card has an annual fee. For example, the BankAmericard Secured Card comes with a $39 annual fee and charges up to $38 for late payments. You can find better offers out there, so make sure to do your research and compare offers from different banks. Credit unions and local banks typically have their own secured or credit builder cards as well. Also check for perks such as cash back on gas or restaurant purchases. You shouldn’t focus solely on the perks when choosing a card, but they are nice to have.

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