Secured credit cards can get your credit back on track

A logotype that reads “secured credit cards.”

Rebuild credit with secured credit cards. (Photo Credit: CC BY-ND/Secured Credit Cards)

When it’s time to apply for a car loan or home mortgage, it helps to have a good credit score. However, all is not lost for those whose consumer credit history has seen better days. Although it can be expensive, using a secured credit card with an initial deposit requirement can help rebuild a credit rating so that large-scale loans are no longer out of reach. Here are some things to consider before applying for a secured credit card.

Know how secured credit cards work

In order to apply for a secured credit card, have an active savings account to serve as collateral for purchases. Generally, the credit limit on the secured credit card will be the money held in savings, although it can be a smaller amount. The card issuer will only take money out if you’re 30 to 60 days delinquent. Once bills on the secured credit card are paid on time for six months to a year, the credit score may have recovered enough to where unsecured credit card options that require no upfront collateral become available.

Issuer must report to the credit bureaus

If the issuer of your secured credit card doesn’t file with the major credit bureaus, the card can’t help you. Showing that you can make payments on time is essential for rebuilding your credit score. Keep in mind that a secured credit card will have an interest rate and grace period, so it pays to shop around for the best terms. Bankrate.com is great for comparison shopping. If you have a savings account that earns interest to go with your optimal-rate card, you’ll be on the road to credit repair.

Watch the fees and spending

Two major but often unavoidable drawbacks to secured credit cards are upfront and annual fees. Ideally, you won’t need a secured credit card for long, so the annual fee won’t hurt much, but the upfront fees can exceed $100 or more. Minimal or no upfront fee is best, but one’s eligibility for such a card will depend upon his or her credit rating.

In terms of usage, try not to use a secured credit card more than you can handle each month. Your goal should be to pay the balance in full monthly and keep total spending at less than 30 percent of the credit limit.