Money 101: How Secured Cards Work

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Whether you’re trying to build good credit (or rebuild it), consider a secured card.

“Secured cards are perfect for people with thin or damaged credit files,” says credit expert Erica Sandberg, like college students, new grads, or folks who are unemployed.

A secured card is not a prepaid card—a prepaid card can’t improve your credit record because it’s not actually a line of credit (it’s more like a debit card).

Here’s how it works, ideally:

  • Submit a “security deposit” (generally $300-plus) to generate a line of credit. Bonus: your credit limit may exceed the deposit.
  • Use the card like a credit card, and pay it off each month. (Your deposit doesn’t cover what you owe; it’s just a deposit in case you default.)
  • Your bank reports your sterling usage to the major credit bureaus.
  • You begin receiving offers for standard credit cards. Some banks automatically review your account after 12 months and “graduate” you to an unsecured card.

Just remember: Secured cards don’t offer the best terms, so shop around—and make it your goal to get to a standard card soon.

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