It can be hard to qualify to borrow money without a credit history or a poor credit history. However, the only way to fix your credit score is to show you can make wise decisions; that is where a secured credit card can help.

What is a Secured Credit Card?

A secured credit card requires the borrower to make a deposit that helps to establish the line of credit. This deposit serves as collateral or backup on the account if the individual fails to pay. The amount you put down as the deposit becomes the credit line you can use.

For example, a secured credit card may require a person to make a $250 deposit. That would allow them to borrow and pay back that $250 over time. The creditor is protected if you use that $250 and fail to make payments because they can use that deposit to cover what you owe. Depending on your creditworthiness, some secured card issuers may provide a credit line more than your deposit, so make sure you research offers in total.

With that deposit, you can use the secured card like any other credit card up to your credit line.

Benefits

The key benefit to secured credit cards is that they can work as a valuable credit-building tool. Most often, they benefit those with a low credit score or no credit history and a wish to establish it. Most of the time, these cards are low risk, too, since they often have a low credit limit.

Using a secured credit card can offer a few key benefits:

• You do not have to have a specific credit score to qualify for one. Most people will be eligible since the deposit creates security for the lender.
• If you want to build your credit score and choose a secured credit card that reports to the credit bureaus, this can help you. Over time, you can improve your credit enough to qualify for an unsecured credit card.

Secured credit cards are often easier to obtain than unsecured ones because the deposit provides security for the issuer, reducing risk. Additionally, by using a secured credit card responsibly and making payments on time, you can build a positive credit history, which can help you qualify for unsecured credit cards in the future.

Drawbacks

Secured credit cards are a good starting point for some people. They are not the ideal credit card in all situations, though, and terms and conditions also differ from one lender to the next.

Using a secured credit card may have some disadvantages:

• Some will have fees associated with them. Fees, including monthly or annual fees and interest rates, can range wildly.
• Your credit limit is typically low. That means your buying power is generally very little to get a start with, and it also means keeping your balance below the ideal 30% utilization rate will be hard to do. (Using just 30% or less of your available credit can help you to build your credit score over time.)

Secured Credit Card Usage Tips

Secured credit cards are one of the best tools for those with an unproven credit history to start the process. Using them wisely, you can benefit from them. Use these tips to help you.

• Compare interest rates and conditions thoroughly. Not all credit cards requiring a deposit will have high fees. Look for those most affordable since your ability to qualify for them will likely be equal across all companies.
• Be sure they offer credit reporting. If the company does not report your use to the credit bureaus, these cards are limitedly beneficial to you.
• Keep them paid off in full month-to-month. That can help you save money on the interest charges while minimizing any negative impact from carrying a monthly debt that’s over 30%.

Over time, you should transition from a secured credit card to an unsecured credit line. Watch your credit score; as it improves, you may apply for a traditional credit card with better terms and conditions.

Secured Credit Card Alternatives

If you have a credit score, even a low one, look for unsecured credit cards that may still be available. Some lenders offer credit cards for those with a bad credit history. Compare the fees to determine if they suit your needs.

You can use tools like Experian Boost to help you build your credit score. This tool lets you link some of the utility bills you pay and streaming services every month to your credit report. Making payments on time every month can help you build your credit without actually costing you money in the process. Just make sure you make payments on time consistently.

Additionally, Experian Boost is just one of many credit-building tools, such as secured or credit-builder loans.