Secured credit cards help rebuild good credit

By Jeremy Simon

Secured credit cards may be a good alternative for consumers with bad credit who don't feel like paying a steep annual fee, but still want to rebuild their credit.

While a secured credit card may still carry an annual fee, it is often relatively low, which can be a relief for those with bad credit. 

Consumers who are approved for a secured credit card account will open a savings account that secures the card's credit limit.  If the card issuer is not paid back for the borrowed funds, they can collect money from the savings account.

Otherwise, a secured credit card behaves much like an unsecured credit card.  The secured plastic can be used for charges wherever a credit card is accepted.  It's an important distinction compared to other credit cards for those with bad credit that can only be used for certain closed-end catalog merchant purchases. 

By consistently paying statements on time, the cardholder can build or re-establish their credit history.  After a solid payment record has been demonstrated, the issuer will frequently convert the account to an unsecured credit card with an increased credit limit.

Make sure to find out during the application process whether the credit card will report payment histories to the credit reporting agencies. Cards that do not report do nothing to improve your credit score.

Consumers that are planning to close their high-fee credit cards and switch to a secured account may want to first apply for a secured credit card.  That way, they will maintain an open line of credit on their credit report.

Once consumers get their new secured card, they can cancel their existing plastic so that they can stop paying its fees.

CreditCards.com offers a number of secured card products designed for those with bad credit. 

Published: May 16, 2007

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