Two Minute Money: How secured credit cards work

Turner Cowles
Producer

Welcome to Two Minute Money, Yahoo Finance’s new personal finance series offering quick explanations for some of the most important questions involving your money.

So you’ve screwed up your finances—and your credit is pretty bad. You want to rebuild it by getting a new credit card, but the only ones you seem to qualify for have crazy interest rates and high fees.

But there is another option: a secured credit card. Secured credit cards are backed by cash collateral, which serves as a line of credit. Your credit limit is usually same as the amount of collateral you’ve paid.

You can use a secured credit card wherever credit cards are accepted.

A secured credit card can help improve your credit, as long as you make payments on time every month. Avoid getting too close to the limit. A goal is to not spend more than 20% of what’s available without paying it off. The best strategy is to put one small purchase on the card per month and pay it off in full.

Watch out for fees

Make sure you do your research to find the card that’s best for you. Some card companies charge high fees. It’s crucial to make sure the card company you choose reports to the three credit bureaus. If it doesn’t, your new good habits you form won’t be reflected in your credit score.

Once your credit score improves, you can move to a traditional, unsecured card. Some credit companies will let you simply upgrade your card, which could be better for your credit score since it doesn’t involve opening a new account. Either way, you’ll get back the money you put in at the beginning.

A card backed by cash sounds a lot like a debit card, right? It’s not. You put up the collateral once and that’s it. And debit cards don’t build credit scores.

Fifty-three percent of people with secured credit cards say they paid it off in full every month. Follow that example. Stay disciplined, and after a couple of years, using a secured card wisely could boost your credit score by 75 points!

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