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The Quickest Way to Build Credit Using a Secured Credit Card

The good news for those in need of a secured credit card is there are tons of options. Which also happens to be the bad news, since all those choices can quickly overwhelm and make you despair of ever finding the right fit.
11/19/2014 08:33pm ET | Updated January 19, 2015
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In this March 5, 2012 photo, consumer credit cards are posed in North Andover, Mass. Consumer borrowing rose by $17.8 billion in January, the Federal Reserve said Wednesday, March 7, 2012. That followed similar gains in December and November. (AP Photo/Elise Amendola)

If you're like a lot of Americans and need to build or rebuild your credit score, then a secured credit card is a good option for two big reasons. Unlike standard credit cards, secured cards generally don't require a stringent credit check (i.e. you can usually have a very low credit score and still qualify). Importantly, many secured cards report how well you pay your bill to the three major credit bureaus -- Experian, TransUnion and Equifax -- that calculate the credit scores that mortgage and auto lenders rely on to determine whether or not to extend you a loan.

The good news for those in need of a secured credit card is there are tons of options. Which also happens to be the bad news, since all those choices can quickly overwhelm and make you despair of ever finding the right fit. And the right fit can depend on issues like how low your credit score currently is because even among secured cards some check credit and others don't. Fortunately, if you take a little time to educate yourself about what to look for in a secured credit card, it won't be long until you're on the road to credit score health.

MasterCard, Visa, Discover and American Express

The MasterCard, Visa, Discover, and American Express logos are more or less ubiquitous. Their presence is also a great sign you're on the right track towards a valid and user-friendly secured credit card. If a card you're considering does not carry one of these logos, chances are you won't be able to use it at many locations -- and really, what's the point of having a card if it's not accepted at the restaurants and stores you frequent?

Instead, what may appear to be a great secured card may really be more of a store charge card. One example of this is the Horizon Gold Credit Line. At first glance, the guaranteed approval, 0% APR (annual percentage rate), and lack of a credit check make it look like a great option. However, look carefully and you'll find that it's not a MasterCard, Visa, or American Express card, but instead limits purchases to products available on the company's own web site. Perhaps even worse, purchases are only reported to a single credit bureau.

Minimum and Maximum Deposit

Secured credit cards generally have credit limits that are based on the amount of money you are able and willing to deposit upfront. Typically, the initial deposit is between $200 and $300, but some can go as high as $5000. The best secured cards will deposit these funds into interest bearing accounts for you, but not all. If the deposit does earn interest, consider this a nice, although not necessary feature. Depending on your personal financial circumstances, these deposit requirements will go a long way towards determining which card makes the most sense for you.

Reports to all Three Credit Bureaus

Credit expert and author Beverly Harzog emphasizes the importance of finding a secured card that reports your account activity to all three major credit bureaus. "There are so many secured credit cards out there, I wouldn't settle for one reporting bureau. Because let's say it only reports to one and then you apply for credit down the road and they don't pull your file from the one credit bureau where your activity got reported; they're going to think you have no credit or not as much as you say you do," she says. Make it as easy as possible for anyone checking your credit report to find the great credit score you've been working so hard to build.

Interest Rates and Fees

Secured credit cards typically have higher interest rates than their unsecured counterparts. In an ideal world, the best way to use a secured card is by paying off the balance in full each month and keeping your utilization ratio -- which is how much of your credit limit you actually use -- at 10 percent or lower. (For example, if you have a $1,000 credit limit and keep your credit card balance to $100 or lower, you will be at 10 percent or less utilization.) But not many of us live in an ideal world. Emergencies and life have a tendency to happen. So look for a card with the lowest interest rate possible in case you ever need to carry a balance. A good rate for a secured card is an APR of around 15 percent or less.

Pre-Qualifications

If you're just starting to build credit or have an extremely low credit score due to bankruptcy, you may be in the market for a secured card that doesn't have any pre-qualifications, such as an employment check, credit check, or checking account. While secured cards that don't have any pre-qualifications can be among the worst as far as terms go, it may be your best card option until you start to raise that score. And once your score does go up (use a service like WisePiggy.com to track your score), start shopping around for a secured card with better terms. Note that while some card issuers may not check your employment status or credit, they're all required to verify your name, address, and date of birth.

Read the Fine Print

Really. Read the fine print. It's overwhelming and time consuming, but the little bit of time that you put into researching a potential offer could save you significant time and money in the future by preventing you from applying for a card with hidden fees that doesn't report to all three credit bureaus. Fortunately, BestPrePaidDebitCards.com has a list of the best secured cards and has done a lot of the painstaking research for you.

Automatic Graduation

The typical goal of using a secured card should be to be able to graduate to a decent unsecured (aka normal) credit card within 12-18 months. "It's always nice if you get a secured card where there is a pathway to an unsecured credit card with the same issuer. That just makes it a little bit easier because they're going to be familiar with you," says Harzog. But not every card has this option, and Harzog also cautions that any graduation feature is no guarantee that you'll actually get an unsecured credit card. Of course, you can always shop around for an unsecured card (with a different issuer) once your score is in the 650+ range.

Avoid the Allure of Rewards

Very few secured credit cards offer rewards. And while the possibility of rewards may grab your attention, Harzog urges consumers to pay more attention to the terms and conditions attached to any secured card you consider. "Get the best card to rebuild your credit since that's the goal, and the best one you can qualify for," she emphasizes.

Now it's time to start researching the offers so you can pick the right one for your situation. And as one last piece of advice, remember that review sites and reviewer comments are great starting points, but credit card terms can change at any time... so, as noted above, always read the fine print! :)

Written by Amy Arnold and edited by Curtis Arnold, a nationally recognized consumer advocate, who is the founder of BestPrepaidDebitCards.com, which provides ratings of prepaid cards and secured credit cards. Curtis also founded CardRatings.com almost 20 years ago.

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