Even though there are many types of credit cards out there for consumers with good to excellent credit scores, there are very few option for those with bad credit.  If you are looking to repair your credit (or build it) a bank secured credit card could be an excellent choice for you.  This type of credit card has a credit limit based on an amount of money that you deposit into a bank account. The money that is deposited serves as the “collateral” for that card and reflects on your credit card as any other regular type of credit card account.

THESE ARE NOT TO BE CONFUSED WITH PREPAID CARDS (pictured below) that you can buy just about anywhere. Those cards act more like “gift cards” and do not report to your credit agencies and will do nothing to repair or build your credit.

Pre-Paid credit cards (NOT the same as secured credit cards!)
Pre-Paid credit cards (NOT the same as secured credit cards!)

Bank secured credit cards are issued by actual banks and cannot be purchased at a grocery store. If you are interested it is highly recommend that you start with your current banking partner. Check with them to see if they offer “secured” credit cards and make sure it reports to your FICO as a regular credit card. Bankrate.com (not sponsored) has an excellent list of secured credit cards offered by many reputable banks. They will almost always have a (very) low annual fee, and you can open one with as little as $250. It will immediately begin reporting to your FICO score (positively or negatively).

Bank secured credit cards look and work just like traditional credit cards, except they use your bank account as collateral.  This way, there is always money there for the lender in the event that you are unable to make your payment. But be aware that missing a monthly payment would reflect badly on your credit report.

Bank secured credit cards are also ideal for those who have a bankruptcy or simply don’t qualify for a line of credit due to bad credit or no credit history.  Secured credit cards help build your credit and report to credit bureaus like regular credit cards.  If you remain responsible and pay your bill on time, your bank may give you an “unsecured” line of credit – or a standard credit card with no collateral. Many secured cards can also “graduate” into an unsecured card over time and refund you your initial deposit.

Just like other credit cards, bank secured credit cards do have disadvantages that can hit you like a ton of bricks should you use the card irresponsibly.  If you make late payments, the bank can hit you with high interest charges and late charges.  With a credit limit capped out at the amount of your deposit, compounding late fees can max out your card.  However, making on-time payments will prevent this problem.

Build your credit.
Build your credit.

A secured bank card can help people build or repair their credit  history. You might even consider two of them depending on how aggressive you want to get with improving your credit. Once you have kept your secured credit card in good standing for a period of time – you’ll have the satisfaction of knowing that you are taking the right steps in repairing or building your line of credit.

How did you build or repair your credit? Are secure credit cards a good option?

1 Comment

  1. Dividend investing Martin Reply

    Well you definitely need them when you want to start building or even rebuilding your credit score. I remember when I started and naively applied for a regular credit card and everybody was laughing at me when they pulled my non existent credit score record.

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