When used correctly, secured credit cards can be very useful tools. You can use them to prove your ability, or renewed ability, to make timely payments, and ultimately get the benefits of being creditworthy. Secured credit cards are also great for college students or for parents to give as budgeting tools.

The following are answers to common questions about secured credit cards:

What is a secured credit card?
Not to be confused with a debit or check card, it is an actual credit card account issued by a lending institution that is opened with a deposit into a savings account, money market account, or certificate of deposit. The amount of deposit into this required savings account varies from card to card, but generally minimum amounts range from $250 - $500 and may be secured up to $10,000. The funds you deposit are considered 'collateral', and will even earn a little interest since they are being held in a true savings account.

What will my credit limit be, and what fees will I have to pay?
The credit limit you will have is determined by the amount you deposit into the initial savings account. Sometimes the limit will be for the full amount of the deposit; other times it will be a percentage of the total. Other fees that may be attached to your account are application fees, annual fees, and processing fees. It is important to note that all companies do not charge all of these fees. Always read the terms and conditions of the credit card to determine how much you will have to pay in fees before you apply.

What are the benefits to my credit score with a secured credit card?
If your credit history is severely damaged, a secured credit card can be used as a great tool to re-establish your creditworthiness. If you have no credit at all, a secured credit card is a great tool to use to establish a credit history.

Can my credit limit be extended beyond the savings deposit amount? Preset limits cannot be exceeded in the beginning. After several months as you establish good repayment habits, you may qualify for an increased credit limit. In many cases, you may qualify for an unsecured credit card after establishing creditworthiness with timely payments for 12 more consecutive months.

Can I use my secured credit card to rental car or book a hotel?
Yes. Secured credit cards are very useful for transactions like these that require a true credit card and not a debit card. Many hotels and car rental companies will not accept a debit or check card to make reservations, even if you intend to pay cash in full upon the completion of your trip or stay. A secured card can be very handy in this situation as you will be able to complete these kinds of transactions.

Should I make payments or repay the whole balance every month?
If you never carry a balance because you pay the card off in full each month, you are not demonstrating the ability to handle credit, which is what unsecured credit card companies are looking for. Timely payments are what counts toward achieving a good credit score. You should also be aware that frequently charging to the limit on your card can hurt you. It makes you look too dependent on it. The best way to establish a good repayment history is to charge something every so often and take a month or two to pay it back. This is a very reasonable approach to building a credit history with your secured card.

What happens if I do not make a payment on time?
It is important to keep in mind that a secured card is a credit card, not a debit card. Because of this, if full payments are not made each month, then interest is charged on the outstanding balance. The lending institution uses the security money to pay off the debt only as a last resort. Even though the card is secured, it is still possible to damage your credit. If you just use it wisely, you will be rewarded.

Will my payment history get reported to the credit bureaus?
Most secured credit card companies report your payment history to the credit bureaus on a regular basis, but there are some that do not. If your goal is to build or rebuild your credit score, make sure you utilize a company that reports your payment history to the credit bureaus. The report of timely payments is what helps you to increase your credit score. To use secured credit cards as useful tools in proving creditworthiness is simple:

#1 - Use your card in moderation.
#2 - Carry a balance less than 60% of your limit.
#3 - Make consecutive timely payments.

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