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Why Are Secured Credit Cards Necessary For Building Credit?


Face it, credit cards are an essential part of life and not just because of building credit. They are required to procure a rental car, a hotel room or to book a flight. Many businesses demand a credit card before they will cash a check. Using credit cards in a positive, responsible way leads to building credit, which is an integral component for a bright financial future. Unfortunately, there are many individuals that either do not possess established credit or must reverse the damage they inflicted upon it. If either one of those situations applies to you, here are some tips on how to use secured credit cards for building credit.

Secured Credit Cards are Key in Building Credit

A secured credit card requires a deposit of a certain sum into an account in order to receive the actual credit line. The account acts as a form of collateral to secure the line of credit. For example, if a person doesn’t pay the monthly balance, that amount can be used as payment. The amount that must be paid is determined by the individual card. Generally, the average fee ranges from $300 to $500, but some companies are willing to accept $250 or less as their minimum fee. The limit on the card will then either be exactly the same as the amount deposited or a bit higher. The money can be deposited through various methods such as a specific savings account, money market account or as a certificate of deposit. The interest rate received from the deposit is usually the same as what would be supplied by a bank when opening an account.

A Tool for Building Credit, but it Comes at a Price

Secure cards often offer lower interest rates than fees than those provided by unsecured cards for people with either no previous credit history or an awful one. The problem is an individual must pay for the privilege of having one. Interest rates tend to range in the high teens and many secured cards do require an annual fee. Because annual fees can fluctuate so widely, its best to do your homework before deciding on a card or cards. Also, beware of being slapped with hidden processing or application fees when applying for a secured credit card. There have been many victims of this pitfall that discover their deposit has vanished after these fees were applied to their balance.

Why Secured Cards for Building Credit?

These cards are often the most efficient method for an individual to establish they will pay their balance and they are worthwhile candidates for other financial opportunities. If a secured card is used responsibly for six or more months, an individual’s credit rating will skyrocket and improve their credit score. This is exactly what is necessary to move upward on the credit ladder. Secured cards used in the correct fashion are the first step in building or rebuilding credit.


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