Do You Need a Secured Credit Card? 3 Ways to Tell

Not sure if you need a secured credit card? Even if you don’t intend to use a credit card for day-to-day spending, a secured credit card, which requires you to deposit money as collateral, can be the first step to building the credit history you need to make your financial goals reality. Here are three indications that you might benefit from a secured credit card.

1. You’ve Been Denied Credit or Loans in the Past

There are many reasons you may have been denied credit in the past, but credit history does play a role in the approval process for most loan products. Secured credit cards can act as the proverbial first stepping stone to eventually being approved for an unsecured line of credit and establishing a credit history. Because they require that you deposit your own money to secure the credit line, credit issuers bear less risk that you’ll default on the account and will give you give you a chance as a cardholder to build your credit with responsible use.

Secured credit cards can also help you build your credit. In 2013, the Consumer Financial Protection Bureau mandated that credit card companies consider household income for any applicant 21 years or older who can prove “access” to shared money, regardless of whether he or she has an employer (like stay-at-home parents).1 A secured credit card may still be a necessary first step to establish a credit history required to move into an independently held unsecured credit card.

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2. You’ve Had Some Negative Credit Events

Past bankruptcy, foreclosure, missed payments on accounts or failure to make payments altogether may remain on your credit report for up to seven years, and will likely have a negative impact on your credit score. But as experts at FICO® explain your continued credit behavior following those events, including—but not limited to—paying all your bills on time and keeping low credit card balances, will eventually help you establish your credit history. Over time, you’ll diminish the impact of your past financial mistakes, helping you rebuild your credit as well.2

3. You’ve Never Had a Credit Card Because You Are Afraid You’ll Spend Irresponsibly

Credit cards are financial tools that you can use to your advantage to establish a positive credit history. Responsible credit use means charging no more than what you can afford to pay for in full, and paying your bills on time. You do not have to spend a certain amount on a credit card to build credit, nor do you have to incur interest rate charges. But, because credit cards are often required to make online purchases or secure a hotel room, flight reservation or rental car, a secured credit card can help you build a positive credit history that allows you to manage your financial life as you see fit — even if you only use the card to make small purchases on occasion (and pay for them in full by the monthly due date).

Because secured credit card issuers vary in their account terms and conditions, it’s a good idea to ask whether the issuer reports to the major credit bureaus (if they do, and you pay responsibly, it can help you build your credit score). The experts at CreditCards.com also recommend asking whether the issuer gives cardholders the option to move into an unsecured product after demonstrating responsible credit use.3

How you use choose to use credit in your life is entirely up to you — but there is no need to spend more than you feel comfortable charging in order to build credit.

Resources:

1. http://www.consumerfinance.gov/newsroom/the-cfpb-amends-card-act-rule-to-make-it-easier-for-stay-at-home-spouses-and-partners-to-get-credit-cards/

2. http://www.myfico.com/crediteducation/whatsinyourscore.aspx

3. http://www.creditcards.com/credit-card-news/5-slow-steps-rebuild-bad-credit-1265.php

Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries.

Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. 

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