If you way overspent on your first credit card, tanked your credit score and caused your card issuer to close your account, you can dig your way out of this mess by getting a secured credit card. These cards can also help you establish credit for the first time. Your goal with a secured card is to prove that you are responsible with credit -- responsible enough to be trusted with a regular credit card. If you go over the limit on your secured card, you failed that part of the test.
A secured card usually carries fees and high interest rates. Plus, you need to deposit a sum, usually from $200 to $1,000, in the card issuer’s account. You don't actually use this deposit money toward purchases. It is simply there in case you do not pay your bills. Your main responsibilities with a secured card are to make your payments on time and to stay within your limit. Both of these actions can affect your credit score, if your card issuer reports to the credit bureaus.
If you deposit $500 with the lender, your credit limit is $500. You can spend up to that amount, minus any fees for setting up the card. You then need to pay the bill on time. If you are late with your payment or if you go over your limit and your card issuer reports to the credit bureaus, your credit score will suffer. Because you are trying to reestablish yourself in the credit world, you must treat your secured credit card with the utmost respect. Other consequences for spending over your limit include high additional fees or losing your card privileges altogether.
Secured credit cards often come with upfront fees, which are not part of the money you can spend. If your deposit is $500 and the starting fee for the secured card is $100, you must subtract the fee from your limit, meaning that you have only $400 to spend. If you don’t remember to consider the fee, you could go over your limit.
Before you get your secured card, ask the card issuer if it reports your activity to the credit reporting agencies. If you don’t trust yourself to stay within your limit, it would benefit you if the card issuer does not report activity. However, your goal should be to transfer from a secured card to a regular credit card, and the best way to do that is to stay within your limit, pay your bills on time and make sure the card issuer reports that good activity. (ref. 1) You can find out whether the card issuer reports to the credit bureaus by asking the company or by getting a free copy of your credit report through AnnualCreditReport.com.
Another way to stay out of trouble is to use only a portion of your available credit on your secured card. You won't be at risk of going over your credit limit and your credit score can benefit if you have available credit that you don’t use. In most cases, the higher the percentage of available credit you have, the better. If you use half or less of your available credit, it shows that you are responsible with money.
Laura Agadoni has been writing professionally since 1983. Her feature stories on area businesses, human interest and health and fitness appear in her local newspaper. She has also written and edited for a grassroots outreach effort and has been published in "Clean Eating" magazine and in "Dimensions" magazine, a CUNA Mutual publication. Agadoni has a Bachelor of Arts in communications from California State University-Fullerton.