Are you looking to establish or rebuild your credit? If so, you need the right financial tools to achieve your goal. Good news: A secured credit card can help you establish or rebuild the credit you need. Here’s the full scoop on using secured credit cards to build credit.

What is a secured credit card?

A secured credit card uses money you place in a security deposit account as collateral. A security deposit gives lenders the confidence that you will pay them back, even if you have damaged credit or no credit history. That’s because if for some reason you fail to pay your bill, the lender can keep your deposit.

Your credit line is based on your income, your ability to pay and, in most cases, the amount of your security deposit. For example, if you put $1,000 into the deposit account, your available credit line would be $1,000 if you have sufficient income and can demonstrate your ability to pay. (Note that a secured credit card is not the same as a prepaid card. Your initial deposit is simply collateral and doesn’t count toward payments.)

How do secured credit cards work?

  • A secured credit card works just like a traditional credit card. That means you can use it for everyday purchases as well as for transactions where cash or debit cards may not be accepted—booking a hotel room in advance, for example.
  • A secured credit card can help you establish or rebuild your credit. Making your monthly payments on time is just as crucial with a secured credit card as with a traditional card. Remember, if you default on your payments, the card issuer may keep your deposit.
  • Most secured cards are reviewed periodically. If the review is successful, you may qualify to move to an unsecured credit card and receive a refund of your collateral deposit. Eventually, responsible credit behavior can help you qualify for lower interest rates on mortgages, cars and other big-ticket items. When handled properly, using a secured credit card to help establish or rebuild your credit can demonstrate to your credit card issuer and to the credit reporting agencies that you are a responsible consumer who used credit wisely.