Using a Secured Credit Card to Fix Bad Credit

Is it possible to use a secured credit card to fix a bad credit score? And what, exactly, does "secured" mean in the first place? These are common questions from people with bad credit, so I thought it was time to address the subject here on the blog.

Let's start with the basics:

What is a secured credit card, anyway?

A secured credit card is one that requires a deposit payment from the customer. Thus, you secure it with an up-front payment before you can use it. On average, the initial deposit for these cards will range between $500 and $1,000.

For example, I might pay $1,000 for a secured credit card and then be able to charge that amount over time -- or a percentage of that amount. If I make all of my payments on time, the bank might increase my limit without additional deposits on my part.

Also, if you use the card responsibly and make payments on time, you'll eventually qualify for an unsecured credit card. On average, this takes about a year. So you can think of a secured card as a "gateway" to higher credit limits -- and possibly a higher credit score as well.

Here's a good example:
Get a Classic Black Secured Visa Now


Of course, you must exercise even more caution once you earn a unsecured card. With greater credit limits come greater risks. So it's important to apply the same good habits from the secured credit card to the unsecured one. This means using it sparingly, paying all of your bills on time, and maintaining a low balance relative to your limit.

It's important to note that a secured card will usually carry a higher interest rate than a regular unsecured card. You'll probably have to pay an annual fee of some kind, as well. So be sure to find out about these things in advance, before you sign on with a card issuer.

They Can Help You Fix a Bad Credit Score

If you look at the FICO scoring chart, you'll see that your payment history makes up a large part of your credit score -- more than any other single item. So by paying your bills on time (especially your credit card balance), you can improve a bad score. Sure, it takes time. But it can be done. This is one of the main reasons people used secured credit cards in the first place. The other reason, of course, is that it's easier to qualify for a secured card when you have bad credit -- whereas you might get denied or a regular card.

The best way to improve a bad credit score with a secured card is by making small payments each month, and then paying the balance off. This creates a pattern of responsible usage, which is the key to building a good score.

Secured Cards are Not Created Equal

It's important to note that secured credit cards come with a variety of fees and terms attached. Some have reasonable fees and rates, while others border on "robbery." Some secured cards will even require you to pay an "insurance" fee every month, which is simply an attempt to make more money from your bad credit situation. So shop wisely and read the fine print.

The FTC has offered some warnings about marketing scams relating to these cards. That's not to say that all secured cards are scams -- most are perfectly legitimate. Still, there are some sharks in this industry, so it's worth reading the FTC alert I've linked to above.