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Improve Your Credit Score With Secured Credit Cards

If you're trying to establish a credit history, or your credit rating is too low, secured credit cards are a good way to built or improve your credit score. A bad credit rating, or no credit history at all, makes it difficult to qualify for a standard unsecured credit card.

A secured credit card is really no different than any other card in the way it works. The difference with a secured card is that you need to give the credit card company some type of collateral or a deposit that they can issue you credit against. If you were to default on the outstanding balance on the card, they would be able to recover their money from the collateral you have given them.

Secured cards are similar to debit cards or prepaid credit cards in some ways, but rather than removing your purchases from the balance as soon as you make them, a secured credit card is still considered a debt that you have to repay monthly. The collateral or deposit that you give the credit card company does not get touched unless you were to default on your payments.

In some cases, you may be able to negotiate a credit limit that is slightly higher than the deposit you have with the credit card company. This gives you a chance to establish a solid credit history, provided you make your payments on time.

Secured credit cards are a good options in any of the following situations:

  • You have a poor credit history
  • You have no credit history
  • You have declared bankruptcy in the past
  • You are separated from your spouse who has a high debt load
  • You've recently lost your job or you have just started a new one

There are several disadvantages that need to be considered as well. First, you need to secure the card with a depost of some sort that is usually equal to or even more than your credit limit. So you could just use that money to pay for anything you buy on credit, but using it to secure a credit card will help you to improve or establish your credit rating.

Second, you usually are not paid interest on the security deposit so you also lose its earning power while it is tied up with the credit card.

Lastly, secured cards generally have a higher interest rate than unsecured, because they tend to be made available to higher risk borrowers. This means if you carry a balance on your card from month to month, you'll wind up paying more interest than you would otherwise.

Secured cards should be seen as a temporary measure that can be used to improve a person's credit score. Using them properly will improve your credit quite quickly, at which point a standard unsecured card will once again be an option.

Read the next article comparing the differences between a secured and unsecured loan for debt consolidation.

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