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Secured Credit Cards: 6 Tips for Applying & Using

by Barbara Marquand

Secured credit cards can help you rebuild your credit history after financial trouble. Follow these six tips if you're in the market for a secured credit card.

1. Understand how secured credit cards work. To get a secured credit card, you must open and maintain a savings account, which serves as the security for purchases you make with the card. Oftentimes, credit limits are 100 percent of your savings account total, but in some cases they might be a smaller percentage. The credit card issuer doesn't touch the money in the account unless you're delinquent by more than 30 to 60 days. After paying your bills on time for a year or more on a secured credit card, you may be able to get unsecured credit cards.

2. Make sure the credit card issuer reports transactions on the card to a credit bureau. The three major U.S. credit reporting bureaus collect information from banks, mortgage companies, and other creditors about your debts and payment history. Your credit score is then based on this information. A secured card won't help you raise your credit score if the issuer doesn't report to a credit bureau.

3. Shop around for the lowest interest rate. Keep in mind secured credit cards tend to carry a higher interest rate than unsecured credit cards, but the rates vary widely. Also, check the grace period. That's the number of days you have before the credit card company starts charging interest on new purchases.

4. Don't pay high fees. Some secured credit card scams charge huge upfront fees. Avoid those offers and look for a card with no or minimal upfront fees and a low annual fee.

5. Some, but not all, banks pay interest on the savings account that serves as security for the secured credit card. You may as well earn interest on the money--it is yours, after all. Look for a secured credit card with an interest-bearing account.

6. Finally, once you have a secured credit card, charge no more than you can afford to pay off each month, and don't max out the card. You don't have to maintain a balance from month to month to build credit history, and financial experts advise keeping credit card spending under 30 percent of credit limits.

Wisely controlled secured credit card spending and prompt bill payment paves the way to better credit and a brighter financial future.

Published 02/15/11 (Modified 07/09/14)

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