Why a Secured Card Could Be a Great Way to Build Credit

Should you sign up for a secured credit card?

Building credit is important for everyone.

A good credit score can make it easier to borrow when you need to. You might need a mortgage to buy a house or want to take out a car loan to purchase a vehicle. Or you might want to take advantage of a great credit card rewards offer.

Even if you don't want to borrow, having good credit could make it possible to live where you'd like -- even if a landlord checks your credit. And it can help you qualify to make low deposits on utilities.

But it can be really challenging to build credit for one simple reason: You need to show you can borrow responsibly. And lenders don't like to lend you money unless you already have good credit.

That's where a secured card comes in.

Why a secured card can be an ideal option for building credit

If you're having trouble getting approved to borrow so you can start building credit, a secured card could be the ideal solution.

A secured card is a special type of credit card. With most cards, lenders approve you for the card or decide how much you're allowed to borrow based on your promise to repay the money. Instead, you have to make a deposit to get a secured card. You'll normally get access to a credit card with a line of credit that's equal to the amount you deposited.

The deposit you put down "secures" the card, because if you don't pay back the money you charged on your card, the lender can seize the deposit. But you can still use the card just like a regular card.

For example, if you have a secured credit card with a $500 line of credit, you'd put down a $500 deposit. You'd be able to charge up to $500, and as you pay off the card, could charge more.

Since your deposit equals the maximum amount you can charge on your card, there's no risk to the lender. As a result, pretty much everyone can get approved for a secured card. It doesn't matter if you have no credit history, a recent bankruptcy, or other black marks on your credit report.

You can build a credit history

And as long as you choose a secured card that reports to the credit bureaus, you can start to develop a credit history. That history of on-time payments is the most important component of your credit score.

If you pay your secured card on time every month, you'll develop a solid history of on-time payments and see your score increase. Eventually, your good borrowing track record will help you earn a great score and open up other borrowing activities.

Likewise, your credit utilization ratio -- or percent of available credit used -- is also an essential part of a good credit score. Your secured card can help as long as you don't charge more than a maximum of 30% of your credit limit. So, for example, with your $500 card, you wouldn't want a balance of more than $150.

If you use your secured card responsibly, you'll be able to earn the type of score that qualifies you for any credit card and other loans as well. Your effort to build credit will be well worth it.