A secured card is essentially the combination of a debit card and a credit card. A bank allows you to open a special account in which you deposit money, and you’re then issued a credit card (usually a Visa, MasterCard or other major credit card) to charge against the amount deposited. For example, if you deposit $3,000, you can charge up to $3,000.
Once you’ve demonstrated your ability to charge and pay back the funds, some lenders will let you charge two or even three times your deposited amount.
A secured card can help build a credit history if you have none or rebuild it if you’ve gotten into financial trouble. For the most positive impact on your credit history, do your best to pay off purchases in full and avoid carrying a balance on the card. If you pay off it off in full and on time for several months, the bank should offer you an unsecured credit card, which means your credit is good enough to borrow without pledging money to back up your own line of credit on the secured credit card.
There are a few things to look out for when using secured cards:
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Watch out for extremely high fees that cost you more than you’re getting in return. Avoid cards that ask for “processing” or “application” fees. Compare annual fees and interest rates (APRs) to find the best option.
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Make sure the credit card issuer reports to all three major credit reporting bureaus, so you’re getting recognition for your efforts.
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Ask about interest—the kind you earn on a deposit account. Since your money has been deposited into an account, it should be earning some level of interest, usually along the lines of what a savings account would earn.