Building credit from scratch is often referred to as a chicken-or-the-egg problem. If you don’t have a credit history, it can be challenging to get approved for a credit card. But if you don’t have a credit card, it’s hard to build a credit history.
Here’s where secured credit cards can save the day. It’s possible to be turned down for a secured credit card, but if you’re approved for one, it’s a good way to get started on your journey to great credit.
We’ll start with the basics and work our way up to the advantages – and disadvantages – of secured credit cards.
Up ahead:
- Definition of a secured credit card.
- How secured credit cards work.
- Do secured cards build credit?
- Pros and cons of secured credit cards.
READ:
Best Starter Credit Cards. ]
There are both unsecured and secured credit cards. An unsecured credit card doesn’t require a deposit to get approved for the card. The top unsecured credit cards from major issuers are typically used by those who have at least fair credit. There are some unsecured credit cards available for those with zero or bad credit, but they tend to have high interest rates and fees.
Due to the cost of unsecured cards that target those with little or bad credit, many turn to secured credit cards. Secured credit cards do require a deposit, usually ranging from $200 to several thousand dollars, depending on the deposit requirements of the issuer.
The deposit stays in an account, and the purpose of the deposit is to decrease the risk for the lender. If you don’t pay for the purchases you made with your secured credit card, the financial institution will use your deposit to pay it off.
