- What is a Secured Credit Card?
- Pros and Cons of a Secured Credit Card
- Tips for Finding the Best Secured Credit Card
Credit cards are often given a bad rap, but they are also a useful financial tool. Most adults have at least one credit card in their wallet, which they might use for an emergency or when booking airfare, a car rental or a hotel. But although credit cards are commonplace, getting approved for one is easier said than done.
There are specific requirements for getting a credit card, and if you’ve had credit problems in the past, some banks might reject your application. This is discouraging, but don’t close the book on the idea of getting a credit card.
If you’ve been turned down for a credit card after credit card, you’re likely applying for the wrong type of cards. Unsecured credit cards are desirable, but these aren’t the only cards available. Depending on your credit, a secured credit card might be a more suitable match.
What is a Secured Credit Card?
A secured credit card works like every other credit card. The main difference is that these credit cards require a security deposit. This deposit is comparable to a down payment or collateral. Submit a check for the security deposit with your credit card application, and once the bank receives this check, it may issue a credit card with a credit limit up to the amount of your deposit. For example, if you submit a security deposit of $500, you might receive a credit card with a credit limit of $500.
Security deposits protect the bank’s interest, especially if you’re an iffy candidate. Banks take a risk with every loan and credit card. There’s always the chance of a borrower not repaying what they owe. And if this happens, the bank loses money. A secured credit card, however, minimizes this risk. The bank has your security deposit, so if you default and don’t pay your credit card bill, the bank can use your deposit as repayment.
Secured credit cards are widely accessible, but you might not hear much about these cards because some banks don’t heavily advertise their selection of secured cards. To learn your options, visit or contact a local bank or credit union and inquire about these cards. In addition, research and compare options online. Secured credit cards vary, with some cards offering more features and perks than others. Comparison shopping is also essential for getting a competitive interest rate and minimizing fees associated with these cards.
Anyone can get a secured credit card regardless of credit history. But these cards are typically for people who don’t have a credit history and those looking to rebuild their credit. It takes credit to build credit, yet many banks are reluctant to extend credit to people without a prior credit history. A secured credit card can jumpstart your credit history or help you rebound from a low credit score caused by a bad payment record, a bankruptcy or a foreclosure—but only if you use the credit card in a sensible manner.
The bank issuing your secured credit card will report to the three major credit bureaus, so you need to manage the card responsibly to acquire as much positive activity as possible. Here are a few tips for success:
- Pay your bills on time. Payment history makes up 35% of your credit score, so don’t miss a due date. To avoid late payments, submit them as soon as you receive your monthly statement or set up auto pay. Credit card issuers can’t report a lateness to the credit bureaus until payments are at least 30 days past due, but they can charge a late fee if you pay after your due date. Late payments on your credit report reduce your credit score and make it harder to establish a good credit history.
- Pay your balance in full. The amount you owe also makes up a big percentage of your credit history—about 30% of your score. Keep in mind that your security deposit is not prepayment for credit card charges. Since secured credit cards are “not” prepaid cards, you will receive a monthly statement and you’re required to make a minimum payment. To avoid large debt, pay more than the minimum due each month. If possible, pay off your balance in full each billing cycle. As a rule of thumb, the amount you owe should never exceed 30% of your credit line. Keeping a high balance or maxing out your credit card can lower your credit score. Each month, set a spending budget for your credit card, and only charge what you can afford to pay off.
- Only apply for one credit card at a time. If you’re eager to build or rebuild your credit, you might apply for several secured credit cards at once. Each credit inquiry can reduce your credit score, so only apply for one credit card at a time. Once you’ve established credit, only apply for new credit when absolutely necessary.
Pros and Cons of a Secured Credit Card
A secured credit card is a steppingstone to an unsecured credit card, but there are a few pitfalls to keep in mind. Here’s a look at some of the advantages and disadvantages of these credit cards.
Pros of a secured credit card
- Simpler approval process. Secured credit cards are easier to get because your security deposit acts as collateral. If you’ve been turned down for an unsecured credit card or a retail credit card, you might have a different outcome applying for a secured card. Even though the bank issuing the card will check your credit history, the minimum requirements for these credit cards aren’t as strict, thus making it easier to get approved for no credit or bad credit. Before applying for a card, check with different banks and inquire about their requirements for a secured card. This includes age, minimum credit score requirements (if applicable), income requirements and employment requirements.
- Affordable security deposit options. Although you’re required to pay a security deposit, you’ll find that many banks only require a minimum deposit between $200 and $500. Read the fine print of credit card applications to find information regarding deposit amounts.
- Adds positive activity to your credit report. The more negative information on your credit report, the lower your credit score. A secured credit card is an opportunity to add positive activity to your credit file. To reiterate, pay your bill on time every month and maintain a low credit card balance.
- Refundable deposits. One benefit of a secured credit card is that your security deposit is fully refundable. The bank holds your deposit in an interest-bearing account, and only withdraws money from this account if you default. Once you demonstrate creditworthiness and your credit score improves, the bank might convert your secured credit card to an unsecured credit card and refund your deposit.
Cons of a secured credit card
- More expensive than unsecured credit cards. While secured credit cards are easier to get compared to an unsecured credit card, they are also more expensive than these cards. Make sure you compare different secured credit cards to help lower your out-of-pocket costs. When researching these cards, pay special attention to annual fees, maintenance fees, setup fees and the interest rate. It’s important to look for cards with lower fees because these expenses eat into your available balance. The bank charges the annual fee, setup fee, and maintenance fee directly to the card, which means you’ll owe a balance on the card before you make your first purchase.
- Limited rewards. Because secured credit cards are tailored to people with no credit or bad credit, some of these cards don’t offer any type of rewards program, or they feature an extremely basic rewards program. If you prefer a rewards credit card where you can earn points, miles or cash back for every dollar you spend, you’ll have to do your homework and search for a card offering a program that matches your spending lifestyle.
Tips for Finding the Best Secured Credit Card
Several banks offer secured credit cards, but this doesn’t mean that every secured credit card is the right choice for you. Here’s what you need to consider as you search for the best card.
Compare fees. In most cases, you’ll be charged a variety of fees including an annual fee, monthly maintenance fee, and a one-time setup fee. You can’t escape some of these fees, but at the same time, you don’t have to deal with a bank that charges exorbitant fees. Take your time and don’t rush the selection process. Not only should you compare credit card fees, but also interest rates. Secured credit cards tend to have higher rates. To avoid expensive interest charges, don’t carry a balance and pay your bill in full every month. Also, compare security deposit minimums. One bank may require a minimum $250 for a security deposit, whereas another bank requires a minimum $500. Search until you find a security deposit you can afford.
Know the approval. Even though secured credit cards are for people with credit problems, you must meet a bank’s minimum requirement for approval. Some banks may offer secured credit cards to people who have a credit score of 500 or higher, yet another bank allows credit scores as low as 300. Don’t assume that every bank gives a secured credit card to every person with bad credit. By knowing the requirements, you don’t waste time applying for cards you’re not eligible for.
Find out how often the bank reports credit activity. The purpose of a secured credit card is to build your credit score, but this only happens if the bank reports your activity to the credit bureaus on a regular basis. When shopping for a secured credit card, call the bank and inquire as to how often they report activity. Choose a bank that reports activity on a monthly basis.
Ask about qualifying for an unsecured card. Secured credit cards are costly, so you’ll want to build your credit score and qualify for an unsecured credit card as soon as possible. Before applying, contact banks to see how often they review secured credit accounts. Ideally, you should choose a bank that reviews accounts at least every 12 months. The more often the bank reviews your account activity, the sooner you’re able to switch to an unsecured credit card and eliminate expensive fees.
Inquire about interest earnings on deposits. Since the bank holds your security deposit in an interest-bearing account, contact the bank to find out the average interest rate on these accounts. Granted, regular savings account rates are pennies in comparison to other types of accounts. Still, the higher your interest rate, the more you’ll earn from this account.
Don’t worry about branding. Some people prefer certain brand credit cards, such as Discover, American Express or Capital One. However, many banks offering competitive rates for secured credit cards are smaller and lesser known. Don’t downplay the benefits of working with smaller financial institutions. The goal is to establish credit, so even if you start off with a bank you don’t recognize, you can always apply for a major credit card with a bigger bank once your credit score improves. A higher score not only improves your chances of qualifying, it also helps you get better terms.
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You need good credit to buy a house and to receive a low-rate auto loan, plus your credit determines whether you pay a deposit for utilities and a cell phone. If you don’t have a credit history or if you have bad credit, now‘s the time to fix your score. Several banks might have rejected your application in the past, but this doesn’t mean you’re unworthy of credit.
Rather than chase after an unsecured credit card, compare secured credit card options. These cards are easier to get with bad credit, many banks regularly report to the major credit bureaus, and after 12 to 24 months of opening an account, you might qualify for an unsecured card.