Best ways to manage a secured card


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Dear Opening Credits,
I was offered a credit card with a $300 credit limit. How do these cards work? Please inform me on how this works and whether or not I should accept the offer.  -- Enid


Dear Enid,
Presuming you received this opportunity by mail, what you have in your hand is either a pre-screened offer for credit or a pre-qualified one. They sound alike, but are in fact quite different.

If you see that you've been pre-screened, the lender took the time to evaluate your credit report and rating. Based on that information, you appear to be eligible for one of its credit products. There's no assurance that you'll qualify, but your chances are good. On the other hand, if the letter states that you are pre-qualified, the lender merely asked the credit reporting agencies to supply them with a list of people who fit some basic criteria. You may or may not really be eligible for the card.

It is also possible that the account in question is a secured card rather than an unsecured card. If you see the word "secured" in the letter, read the terms carefully, paying attention to what the card will cost you.

With a secured credit card, you have to put some money down as collateral, which guarantees the account and reduces lending risk. You don't lose the money, but the issuer can claim funds held in deposit if you are late with payments. Most secured cards charge an annual fee, but other fees are to be avoided. For example, some charge fees to apply, process paperwork or to service the account monthly. All told, they can erode your spending ability and put you near your limit before ever making a purchase!

There is a good chance that you received this offer because your credit is not so great right now. If you are interested in rebuilding your credit rating, a card with such a tiny limit, whether secured or unsecured, can work in your favor, as long as you treat it right. Most important to a credit score are on-time payments, so if you charge a little each month and always pay by the due date, you'll make steady improvements.

However, because the charging limit for this account is so small, it will be easy to rock the utilization ratio, which is the second most important credit scoring factor. If you maintain a high balance compared to the limit, your scores will suffer. The lower the balance, the better. It's best to pay the bill in full, though, and if you ever charge a significant part of the credit available, pay the bill well before the due date. That way you can prevent the balance from being factored into your credit score if activity about your account is sent to the credit bureaus before you have a chance to zero out the balance.

Ultimately, what's most important is that you are sure you want this particular credit card. Never base your credit shopping decisions on one marketing letter. There is a whole world of plastic out there, and you may be eligible for a far better deal than this.

Find out what your current credit score is at, and then check out the vast array of options that are available to people in your scoring category. Who knows, you could qualify for an account that allows you the freedom to charge thousands, not hundreds, all while accumulating rewards points for travel, goods and cash.

See related: Turned down for a secured card? Now what?, Prescreened credit card offers: What exactly are they?

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Published: September 10, 2014

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Updated: 10-23-2016

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