If you don’t qualify for an unsecured credit card because you’re only starting out, you’ve got a bad credit history or you’ve been bankrupt in the past, you may be wondering how you can build up your credit history when you can’t get approved for a regular credit card.  Well there’s one way around this problem and it’s called a secured credit card.

A secured credit card requires you to deposit an amount in a special account that’s equal to the limit on the card.  The limit on the card may be very low, e.g. $250 or $500.  That means you’d have to deposit at least $250 for a secured credit card with a $250 limit.

Some banks may even require you to deposit double the amount of the card limit!  That is a way for the bank to safeguard their money as although it’s a secured card, you’ll still be charged interest on your purchases like a regular credit card.

Since people who apply for secured credit cards are deemed a financial risk, the bank needs to do everything they can to minimise the risk to themselves.  That’s why applicants are required to demonstrate that not only can they afford the deposit amount, but that they can also afford to pay the card balance if they actually use the card.

Secured credit cards can be used in the same way as unsecured cards.  So you could use your secured card to pay for purchases, flights, accommodation and anything else you can think of.  But you do have to keep in mind exactly what your credit limit is and how much you’ve already spent that month.  If you accidentally go over your limit, you may be contacted to “please explain” the situation!  You may also be required to pay an over limit fee.  If you’re trying to build your credit history, you definitely don’t want to be in this position!

One way to make a good impression on your credit history file is to pay off your balance in full every month.  It will stand you in good stead when you apply for an unsecured credit card in the future.  The credit card lender will look at your credit history and will be able to see that you’ve managed your credit card repayments without a problem and have been scrupulous in clearing your card balance each month.  This will make them more inclined to approve your application for an unsecured credit card as compared to someone with a secured card who only pays the minimum balance due every month and is slowly reaching the limit on their card.

Secured credit cards can be a good way to build up your credit history, especially after bankruptcy.  However, you do have to be careful in how you use the card so you don’t get into a mess with credit card debt.  If you pay off the balance in full every month you’ll be showing future lenders that you are now a good financial risk and you’ll reap the benefits.