Building credit is often a conundrum. Lenders want to know that you’re a responsible borrower before extending you credit, but how are you supposed to prove you’re worthy of credit if no one will approve you to begin with?

Someone has to be willing to take a chance on new borrowers and those who have made mistakes in the past. This is typically where secured cards come into play.

If you’re looking to apply for your first credit card or are rebuilding your credit history, a secured credit card may be the perfect tool for you. Let’s discuss the ins and outs of these cards so you can make a well-informed decision.

What is a secured credit card?

A secured card is a type of credit card that is backed by a cash deposit from the cardholder. You get credit that you may not receive from anywhere else, and the deposit helps reduce the lender’s risk of losing money, as it can recover overdue payments from your security deposit.

In most cases, the card’s limit is 50 to 100 percent of the deposit, although some companies will offer higher limits as a promotional incentive. If you use your secured card responsibly, some companies will reward you by adding to your credit line without requesting additional deposits.

Since approval is typically guaranteed, these cards are often perfect for those with no or poor credit.

Why would you want a secured credit card?

1. They can help build your credit history. Unlike prepaid credit cards, secured credit cards give you an actual credit line. Most lenders that offer secured cards will report your activity to the major credit bureaus, which can help grow your credit report and raise your credit score .

2. They can help you get an unsecured card. If you use your secured card responsibly, it could help you build a solid enough score to get you approved for a card that doesn’t require a deposit. In addition, some lenders will review your account after a certain amount of time and upgrade you if you qualify.

3. They’re usually easier to get approved for than unsecured cards. Since secured cards typically don’t require you to have a previous credit history or a minimum credit score, approval is almost guaranteed. This is a big win for those who have poor credit or no score at all — two groups of consumers who may not be able to qualify for other forms of credit.

Why would you not want a secured credit card?

1. They can be expensive to use. Since the card issuer is taking a risk lending money to someone with no credit experience or someone who has mismanaged credit in the past, secured cards can be more costly than their unsecured counterparts. Watch out for the following:

— Various charges. Depending on the card, you could be hit with an annual fee, application fee, monthly account fee, credit limit increase fee or more.

— Mandatory add-on products. This won’t happen with every card, but some lenders may require you to purchase other products, like insurance, as part of the contract.

— High interest rates. Secured cards are often known for having higher-than-normal interest rates, which could add up to a lot of money if you don’t regularly pay your balance in full.

— Security deposit. While some companies may put your deposit in an interest-bearing savings account, not all do, so your money may just sit instead of growing.

2. Some may not help you build credit. Not all secured cards report to the credit bureaus. If your goal is to build your credit, be sure to pick a card that will regularly update the bureaus.

3. They can hurt your credit if you don’t use them responsibly. If your secured card issuer reports to the bureaus, it will report everything — both good and bad. Your on-time payments can build your score, but just one late payment could kill it .

How can I use a secured credit card responsibly?

If you have a secured card or are thinking of applying for one, it’s important to make sure you use it responsibly so if your activity is reported to the bureaus, it will help you build a solid credit history. Secured cards act like unsecured cards, so the typical advice applies: Make your payments on time and keep your balances low. Not only will this show that you’re a responsible borrower, but it should also instill good habits that may come in handy if you’re granted more credit in the future.

Also make sure you don’t charge more than you can handle, and pay off the balance in full as often as you can. Since many secured cards have high interest rates, this could save you a lot of money.

The Bottom Line

Secured cards can be great tools for consumers to build or rebuild credit. The important thing to keep in mind is that each card can vary, so compare a variety of cards and check out reviews to ensure you get the best card possible. Also look closely at the cardholder agreement so you understand the terms and conditions. Finally, educate yourself on the best financial practices, and practice good credit habits to ensure all your hard work pays off in the future.

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Why You Might Need a Secured Credit Card originally appeared on usnews.com