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Having a good credit history is paramount when it comes to larger commitments like renting an apartment or taking out a mortgage. But building credit can be difficult for those without the credit score necessary to obtain a credit card in the first place. In this event, a secured credit card offers an accessible path to build better credit and qualify for the credit card you want.
The idea behind a secured credit card is that you need to put down a secured deposit as collateral, which then becomes your credit line. Depending on the amount you deposit, you can get a credit line between $300 and $5,000. But to get a chance to deposit higher amounts, you need to use your card responsibly for at least six months. With responsible card use, you can build your credit over time and eventually graduate to an unsecured card.
Once you find the right secured card for your financial situation, here’s how it works:
Here’s how to use a secured card to effectively build your credit:
The primary difference between a secured card and an unsecured card is that a secured credit card requires a security deposit. This security deposit can range from $50 to more than $200 and acts as collateral for the issuer (and sometimes acts as your maximum credit limit).
It’s a sort of guarantee that if you go belly up on your payments and your account is closed, the issuer is covered for losses. And don’t worry: assuming you used your secured card responsibly, you’ll get your deposit back after you close your account.
Otherwise, secured credit cards are nearly identical to unsecured credit cards in how they function, including how they affect your credit score. Just know that a secured card will typically have a lower credit limit and higher APR than an unsecured card.
Secured credit cards and prepaid cards may look similar, but they have notable differences. The main difference between the two is:
Secured credit cards offer an array of benefits for those looking to build a poor credit score or those without any prior credit history whatsoever. However, these cards also come with a few drawbacks that can make them not the right fit for everyone. Check out our secured cards guide to see whether it’s the right choice for you.
If you’re looking for a credit card, but have poor or no credit history, compare secured credit cards that fit your financial needs. Look out for high APRs and fees, spend responsibly and pay your monthly bills on time to build your credit. In time you’ll be able to start applying for a cheaper, unsecured card.
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