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How to Rebuild Bad Credit With a Secured Credit Card

Dec. 17, 2014
Credit Cards
How to Rebuild Bad Credit With a Secured Credit Card
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If you qualify for only bad credit credit cards, you may already know about secured cards. Borrowers with secured credit pay a deposit on their card, which acts as their credit limit and their lender can use as insurance should they skip out on a bill. Secured credit cards are a step below traditional, unsecured cards, but there’s good news: If used properly, they’re a great way to rebuild bad credit. Eventually, many users graduate to an unsecured card.

What does it mean to use a secured credit card properly?

Choose a card with reasonable fees and policies

Like some traditional credit cards for people with bad credit, secured cards may come with sky-high interest rates and fees. Others don’t offer a payment grace period, a stretch of time between the end of your billing cycle and your card’s payment due date during which you can pay your balance without incurring interest. These policies can set you back financially and make it more difficult to obtain an unsecured card later. Make sure to get your secured card from a financial institution you trust, such as your bank or credit union.

Make sure your issuer is reporting your payments

Secured credit cards can help you build credit, but this requires some help from your issuer. Most, but not all, providers of secured cards report user data to credit bureaus Equifax, Experian and TransUnion. Don’t get a card from a lender that doesn’t. If there’s no way to find out about your issuer’s disclosure policies before signing up, pull a credit report in a few months to see whether it reflects your payments.

Use it responsibly

No secured credit card can help you build credit if you don’t use it responsibly. And because your secured card’s credit limit will be much lower than an unsecured card’s, it’s even more imperative to control your spending when you have one. You don’t need to max out the card each month to spend too much. Try not to spend more than 30% of your available credit during your billing cycle and don’t carry a balance.

The bottom line

Having a secured credit card may be a drag, but think of it as a good first step. With patience and on-time payments, your card issuer should offer you a traditional credit card. When this happens, ensure that it returns your deposit in accordance with your card agreement. Proving you can manage credit will eventually qualify you not only for credit cards for poor credit, but for cards with rewards and other perks.

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