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When To Consider a Secured Credit Card

If you have bad credit because of past late payments or charge-offs, a secured credit card is the best way to rebuild credit. Why? It will protect you from yourself.

If you have bad credit because of past late payments or charge-offs, a secured credit card is the best way to rebuild credit. Why? It will protect you from yourself.

Marketers of unsecured credit cards for consumers with poor credit give secured credit cards a bad rap. They try to make you think that unsecured credit cards are superior. In fact, if you have poor credit and can qualify for an unsecured credit card of any kind, the credit card company is going shake you upside down for every penny you have.

There are application fees, approval fees, annual fees, monthly fees, and not to mention 30% interest rates and the chance you could get in over your head again. Haven’t you paid creditors enough?

Secured credit cards, on the other hand, allow you to rebuild your credit score without the risk of racking up more debt.

That’s because secured credit cards have credit limits tied to how much cash you actually have in a bank account. They are similar to prepaid, rechargeable debit cards, but not exactly the same.

Secured credit cards can be used to reserve things like hotel rooms and rental cars when often times debit cards and prepaid cards cannot be. Additionally, using and repaying a secured credit card will rebuild your credit. Using debit cards and prepaid cards will not!

In this way, having and using a secured credit card is actually better for those with bad credit than using cash only. Yes, you will pay some interest and sometimes fees for using your secured credit card, but if you use it to make normal purchases each month, your credit score will be updated showing you paid on time. You can never go over limit or get in too debt because you can’t charge more than you have. It’s a win-win.

If you need to rebuild your credit or have been using cash only to the determent of your credit score (even somebody with good credit needs to use a little credit to keep their score healthy), a secured credit card may be your best bet.

I recommend the Capital One® Secured MasterCard® which has only a modest annual fee. If you have a good relationship with your local bank or credit union, you may want to look there, too. Be wary of cards from banks you don’t recognize, however. Many come with hidden fees that you shouldn’t have to pay.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.