Bad Credit? Use a Secured Credit Card to Rebuild

Beverly Harzog is a nationally recognized credit card expert, author, and consumer advocate. She blogs about credit cards at BeverlyHarzog.com.

I cringe when I hear credit repair "experts" tell folks they can boost their credit scores by 60 points in 48 hours... for a small fee, of course.

Unfortunately, the world of credit scoring doesn't operate that way. It takes time to improve your credit history and bump up your score. But there is a good way to add a little oomph to the tedious process of rebuilding your credit. 

Use a secured credit card responsibly and speed things up. Let's take a look at how these cards can help you.

How a Secured Credit Card Works

Here's what you do with a secured credit card: Put a deposit in an account with the bank that's issuing the secured card and this amount, in most cases, becomes your credit limit.

Now, there are some hybrid cards that I refer to as partially secured. In this case, your deposit might be, say, $200, but you'll often get a $500 (or higher) credit limit. You'll find out if you qualify for a partially secured card after your application is approved. Your deposit stays in the bank to "secure" your credit card. So be sure that you can temporarily live without that amount in your regular bank account. Some issuers will let you earn interest on your deposit, but many do not.

When you receive your secured credit card, you'll use it the same way you'd use a typical, unsecured credit card. You actually buy items on credit.

How a Secured Credit Card Can Boost Your Credit Score

If you get a secured credit card that reports to all three major credit bureaus, your payment history will show up on your credit reports.

If it isn't clear on the website or in the disclosure statements whether the card issuer reports to the major bureaus, ask the issuer. This is important: Confirm it.

Keys to Successfully Build Credit: In the Fine Print

I read the fine print for secured credit cards every week because I write credit card reviews. Yes, I know you're envious of the glamorous life I lead.

I'm telling you this because I know firsthand this stuff is painfully dull. But you have to do it. Plop yourself into a comfortable chair (not a recliner or you'll fall asleep) that's close to strong lighting.

Here are a few things to look for:

  • Security deposit: Note the minimum, which is usually at least $200, and the rules for getting your deposit back.
     
  • Payment holds: Lately, I've seen terms on a few secured cards that state your payments will be held seven to 10 days before they're applied to your account balance. You need to know whether this applies so you don't inadvertently go over your credit limit.
     
  • Annual fee: This is pretty standard. Expect to pay $29 to $49 for the best cards. But I've seen a few issuers charge around $75.
     
  • Variable APR: Look for a card with an annual percentage rate (APR) from 14.99% to about 23%. I've seen rates as high as 36% -- stay away from a rate like that.
     
  • Grace period: A common tactic is to promise a very low interest rate -- then once you're roped in, you find out there's no grace period. This means that as soon as you buy an item, it starts accruing interest.

Other "gotchas" to watch for: application fee, monthly maintenance fee, credit limit increase fees, returned payment fee and more. Really, I could go on all day. Read the fine print to protect yourself.

Tips for Using a Secured Credit Card: Do's and Don'ts

To increase your chance of success, keep these in mind:

  • Do use the card even if it's just for small purchases. You can't generate a credit score if you don't use the card.
  • Do pay your credit card bill on time.
  • Don't max out the card. Keep your credit card balance low.
  • Don't carry a balance. This is vital if you end up with a card with a high interest rate.
  • Do pay all your bills on time every month.

Using a secured credit card is an excellent way to jumpstart the rebuilding process. Be patient and before you know it, you'll see your history and your score improve. Every situation is unique, but if you don't have a recent bankruptcy or judgment on your credit report, you might qualify for an unsecured card in 12 to 18 months.

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