If you have poor credit, a secured credit card can put you on the road to credit score recovery.

3 minute read

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If you have poor credit or haven’t yet established a credit history or a credit score, you – and your credit – could benefit from a secured credit card. Here’s how it works.

Unlike with traditional credit cards, which aren’t secured with any collateral, with a secured credit card, you deposit a small amount on the account to cover any amount charged, up to your credit limit. The deposit eliminates any risk to the card’s issuer, so it’s easy to get approved, even when you have bad credit.

Find out if getting a secured credit card is right for you.

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1. Your deposit determines the card’s credit limit

With a secured credit card, if you have poor or no credit, the credit card company usually sets your credit limit at the amount that you deposited to qualify for the card.

The deposit amount for a secured credit card is typically low – ranging from $50 to $300 – but you can deposit more to receive a higher credit limit, too. For example, if you deposit $1,000, the card’s issuer will likely set your credit limit at $1,000.

Find out: The Best Credit Cards for Your Lifestyle

2. You don’t need good credit to be approved

With traditional major credit cards, you generally have to have fair-to-excellent credit to be approved. You can get a secured card, however, even if you have poor credit – or no credit history at all.

That’s because with your deposited amount, the credit card issuer doesn’t assume the same risk as it would with an unsecured credit card. If you default on the account, the issuer will simply apply your deposit to the amount owed.

Find out: Are There Credit Cards for Those With Bad Credit?

3. Secured credit cards have higher interest rates

A secure credit card typically has a higher interest rate than many non-secured cards. You can get around that, however, by paying off your statement balance each month so you don’t pay any interest.

Another plus of paying off the statement balance every month is that by doing so, you are establishing a solid and positive payment history, which accounts for around 35% of your credit score.

4. A secured card can help you build credit

Once you have a secured credit card, you can begin building a positive payment history on your credit report and working towards a better credit score. Remember, though, your payment history can also affect your credit score negatively if you pay late.

The safest way to build or improve your credit with a secured card is to charge a small amount – even as little as $10 or $20 – each month and pay off the total monthly statement balance.

5. Some secured cards allow you to “graduate”

Some credit card companies issuing secured credit cards may offer you the option of getting your deposit back after several months of making payments on time.

For example, when you have a Discover it Secured card, Discover reviews your account payment history automatically each month, starting at eight months, to determine whether it can return your security deposit and allow you to continue using the card as unsecured.

6. You can get your deposit back

As long as you’ve paid any balance, you will receive your deposit back when you close the secured credit card account.

Hopefully, the day will come when you do close the account, trading up for the kind of low-interest card with healthy rewards and benefits you can get approved for once you’ve improved your credit score by using a secured credit card responsibly.

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About the Author

Deb Hipp

Deb Hipp

Deb Hipp is a full-time freelance writer based in Kansas City, Mo. Deb went from being unable to get approved for a credit card or loan 20 years ago to having excellent credit today and becoming a homeowner. Deb learned her lessons about money the hard way. Now she wants to share them to help you pay down debt, fix your credit and quit being broke all the time. Deb's personal finance and credit articles have been published at Credit Karma and The Huffington Post.

Published by Debt.com, LLC