If you have poor credit, or none at all, it’s tough to get a loan or line of credit — even though that may be exactly what you need to up your credit score. Building a record of on-time payments can do wonders for your creditworthiness.

The good news: A secured credit card, which requires a refundable security deposit in exchange for a line of credit, could be the solution. Lenders are more willing to issue secured credit cards to risky borrowers because the deposit will be used to cover the balance if it goes unpaid.

How a Secured Credit Card Works

Like any other credit card, you first have to apply and get approved. Secured credit card applications are similar to other credit card applications in that they require your basic financial information, as well as your permission to perform a credit check. But they differ in that a secured credit card application will also require your bank account and routing number in order to submit a refundable security deposit.

Once you’ve been approved and put down your deposit, a secured credit card functions much like its unsecured counterpart: You will receive a statement each month, and you should try to pay your balance in full each month by the due date to avoid interest charges on new purchases.

You will enjoy the convenience and security of a credit card, as well as any benefits or rewards that the card offers. For example, it can be much easier to reserve a hotel room or rent a car when you use a credit card.

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How Secured Credit Cards Differ From Prepaid Cards and Debit Cards

Secured credit cards, prepaid cards and debit cards all require account holders to provide funds before any purchases can be made, but that is roughly where the similarities end. With prepaid and debit cards, the amount of each purchase is immediately subtracted from the balance of the account. But with a secured credit card, the money you put up — the refundable security deposit — is unaffected when you make a purchase and is not used to pay the account balance (unless you go into default or close your account with a balance). Rather, your charges will appear on your monthly statement with an amount due for that month. Your on time monthly payments are separate from the money you put down initially.

Whereas most prepaid and debit cards generally do not report to credit bureaus, most secured credit cards do. This is why they are an attractive way to build credit — your responsible use counts for something.

And that’s why it’s critical that secured credit card users make on time payments each month in order to build a strong credit history.

Graduating From a Secured Credit Card

The goal of many secured credit card users is to improve their credit score to the point where they qualify for a regular, unsecured credit card and they can get their security deposit back. Alternatively, secured credit card users can always pay off their remaining balance and close their account at will.

Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. 

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