Bad credit? No credit? Try a secured credit card

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Not everyone can qualify for a traditional credit card.

If you’re young and haven’t built a credit history—or if you’ve missed a few bills and have tarnished your credit record—a credit card may seem hopelessly out of reach.

But there is a solution: A secured credit card offers easy approval and comes with the same spending flexibility and safety features of a regular card.

What is a secured card: the lowdown

You can apply for a secured credit card just as you would a traditional card. Once you’re approved, however, you must make a refundable deposit with the company issuing the card. Your credit limit—that is, the amount you can charge—is typically equal to your deposit. For instance, if you deposited $500, you could charge up to $500 on your card. Some lenders may offer you a credit limit of more than 100 percent of your security deposit, and others may set a 50 percent limit. The lender will hold your deposit as collateral for as long as you keep your secured card.

When you make purchases, a secured credit card is no different from an unsecured card. Your card will be accepted anywhere a traditional card is accepted, and your transactions are protected by the Fair Credit Billing Act, meaning you won’t be responsible for fraudulent charges or purchases you never receive. You will also receive monthly statements just as you would with a regular card and must make the minimum payment to avoid fees. (You can’t dip into your deposit to cover transactions.)

How a secured card can help you

Unlike a debit card, a secured card appears on your credit history. When you use it to make purchases and then pay the balance in full, you will boost your credit score. Paying off the balance keeps your utilization rate—or balance to available credit ratio—low. A ratio of 30% or lower is ideal for helping your score. For instance, if you have a $1,000 credit limit, try not to charge more than $300.

Secured cards can also come with many of the same benefits that normal credit cards offer, such as rental car insurance and extended warranty coverage. Many credit card issuers also offer free credit monitoring—a useful perk for those trying to rebuild their credit. After making on-time payments for a year, you can apply for a regular card and get your deposit back on your secured one.

What’s the catch?

While traditional cards offer credit lines of $10,000 or more, a secured card typically gives you a credit line of only a few hundred dollars, curbing your ability to spend. Because card issuers are assuming more risk by taking customers with poor or no credit scores, the interest rates and fees are often higher than they are for traditional cards. Finally, if you fail to repay your balance, your deposit will be at risk.

What to look for in a secured card

Whenever you compare credit cards—secured or unsecured—look at the interest rate and fees, including application fees, additional card holder fees and annual fees. Some secured cards have no annual fee, but others have high fees. The Consumer Financial Protection Bureau offers more tips on what to look for when shopping for a card.

Finally, look for a card issuer that will let you “graduate” from a secured card to a traditional card once you’ve shown that you pay your bills regularly. That way you can transition seamlessly to the additional perks of a traditional credit card.