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3 Times Getting a Secured Credit Card Makes Sense

Elizabeth Aldrich, The Motley Fool

If you have bad credit or no credit at all, a secured credit card might be the right tool for you. Find out here.
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Woman looking at three credit cards with frustrated face

The best secured credit cards are an excellent tool for building and rebuilding credit fast. They give credit access to people who usually don’t qualify due to low credit scores. At the same time, they often come with disadvantageous terms and conditions, ranging from high interest rates and account fees to hefty deposit requirements and limitations on what you can do with the card. If you are struggling with qualifying for traditional credit cards, these are the top reasons to get a secured credit card.

What is a secured credit card?

When you think of a credit card, you probably think about an unsecured card -- the issuer does not require a deposit, but does require a decent credit score. In contrast, a secured credit card is backed with an initial deposit to offset the risk of lending to someone with bad credit or no credit at all. Both secured and unsecured credit cards are used the exact same way, they just require different terms for gaining access to a credit line.

1. You have no credit

If you don’t have a credit history, a secured credit card can help you build your credit. To use your secured card to your advantage, use it sparingly each month and pay off the full balance before the due date. Keep in mind that no credit isn’t an automatic barrier to obtaining an unsecured card, but they often will come with much higher fees and interest rates.

2. You have bad credit

Most of the best credit cards for bad credit are secured credit cards. Secured credit cards are commonly used by people who have bad marks on their credit history and don’t qualify for a regular credit card. Secured credit cards typically have no credit score requirement because they’re secured by a deposit that the cardholder must make in order to use the card. This makes them ideal for those who need a second chance to repair their credit. When used responsibly, secured credit cards can be a great tool to help rebuild your credit and practice healthy financial habits.

3. You don’t have anyone to add you as an authorized user on their credit card

There may be another option to boost your credit score -- have someone add you as an authorized user on their existing credit card. Any activity on the credit card, whether it’s their actions or yours, will affect your credit. Remember, this can be a positive or negative effect. If they are responsible with their credit card, your credit score will increase, but if not, you’ll see a drop. If you don’t have someone willing to place you as an authorized user, a secured credit card can serve your needs in the short-run.

What to look for in a secured credit card

When searching for the right secured credit card for you, look for a low deposit requirement and low annual fees. Annual fees are common, but you can find some with no annual fee. You will also need to look for a card with a low interest rate to avoid paying high interest charges each month.

You should determine if you will have the option to transfer your secured line of credit to an unsecured credit card. This will help your credit score because you won’t have to open a new account. Some secured credit cards give you the opportunity to qualify for an unsecured credit card after a year of on-time payments. Your goal should be to move from a secured credit card to an unsecured credit card as quickly as possible, as they tend to have lower fees and no security deposit required.

Regardless of what type of credit card you choose to use, you should always plan to pay your balance in full each month. This is especially important when using a secured credit card because your interest rates will likely be much higher, costing you more money.

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