Secured Credit Cards Build Foundations Of Good Credit, Habits

According to the Consumer Financial Protection Bureau’s latest report on the credit card market, more Americans are signing up for secured credit cards than ever before, especially those with zero or deep subprime credit - a FICO score below 550.

Zero or bad credit history increases loan interest rates, decreases chances of moving into a home or rental property, and can hurt employment prospects. This ends up costing thousands over a lifetime. Fortunately, there are ways you can gradually build credit and good habits.

What Is A Secured Credit Card?

Secured credit cards are backed by a cash deposit. Secured cards start out with a fairly modest credit limit. This puts the bank in a less risky position. Once you have established your credit, made timely bill payments, and prove you are a responsible credit card user, the card issuer can gradually increase your credit limit. Eventually, you can retain a good credit score and can qualify for an unsecured credit card.

Apply For A Secured Credit Card

First, you will have to apply for a secured credit card. Often, you can do this your bank or any credit card company. After you're approved for a secured card, the issuer requires a cash deposit. Usually, this amount ranges from $300 to $500. The amount of your deposit will be your credit limit. The issuer receives this deposit as collateral in case you fail to make payments toward the card.

Although secured credit cards require money put down on your part to use them, they're not like debit or prepaid cards. You don’t have access to the deposit you put toward the secured card. However, if you close your account, the card issuer refunds your deposit.

Be Responsible With Your Card

Keep in mind that your payment history makes up roughly one-third of your credit score. That means you should strive to pay off your credit card balance in full each month. This can raise your score and save you from paying interest. Your use is reported to the three major credit bureaus: Equifax, Experian, and TransUnion.

Be responsible for a year or longer. You may begin receiving offers for regular unsecured cards. Your issuer may offer to switch you to an unsecured card as well. After you switch, continue using the same responsible practices you used with the secured card and keep your spending under control.

For many, a secured credit card is the best option for building good credit and habits. Over time, you can move up to an unsecured card and continue on your credit building journey.