How can you rebuild your credit when you can’t get approved for a line of credit in the first place?

Let’s use this as a scenario: A consumer takes out a reasonably-sized loan. Maybe it’s for school, maybe for a house, maybe to start a small business. They make their payments on time and their debt slowly starts to dissolve. Then, something bad happens. Whether it’s a medical emergency or some other personal disaster, the borrower is no longer in a position to make their payments.

They scrape and scramble to pay what they can, but their credit score continues to tank. When the dust settles, they can’t even get approved for a credit card. This story is all too common, and the way forward isn’t always clear. But a secured credit card might be able to help.

Whether you have a rocky credit history or have yet to establish one, a secured credit card is a great way to safely raise your score over time. Here’s what you need to know about how they work and how to use them.

What is a Secured Credit Card?

A secured credit card is halfway between a traditional unsecured credit card and a prepaid debit card. The main difference between the two is that issuers who provide secured credit cards require a cash deposit to act as collateral before giving out the card.

The deposit must usually be the same amount as the credit limit. For instance, if you get a card with a $200 credit limit you’ll have to deposit $200 of your own money. Sometimes you might qualify for a card with a deposit less than the credit limit, but it’s not very common.

Just like a security deposit pays for any damages you might incur while renting an apartment, a secured credit card deposit reassures the credit card company that you won’t run up a balance and then default on your payments.

How can I Make the Best Use of a Secured Credit Card to Build my Credit Rating?

Building a great credit score can be a bit of a Catch-22. To build your credit, you need to apply and be approved for credit—but to be approved, you need good credit already.

That’s where secured credit cards come in. They report your activity to all three credit bureaus, allowing your credit to improve as you use the card. Since card providers ask for a deposit, they’re protected in case you stop making payments. It’s a win-win for everyone.

Many consumers get prepaid cards and secured credit cards confused with one another, but they act very differently. Prepaid cards are more like gift cards or debit cards than credit cards, and using them won’t help you establish a solid credit history like secured cards do.

Also, prepaid cards typically likes to charge excessive fees when you reload the card, withdraw your cash or pay any of your bills online.

Next Steps…

It’s time to start working towards building your credit. The first step is getting your secured credit card today. Take the leap to a better credit score and a new beginning.