If you’re just getting started on your credit journey or have past credit problems, you may be seeing a lot about secured credit cards.
A credit card is the quickest and most effective way to help you build a positive credit history. However, it can be a struggle to be approved for one, because you have to have an established credit history to prove that you’re a worthy candidate for a credit card. For some, it’s difficult to build a better credit score because their choices involving credit haven’t been positive to date. If this is a problem you’re encountering right now, a secured card can offer you a better way.
Secured credit cards are often offered to people who have little to no credit history or a damaged credit history. They are particularly popular cards for people who may have a checkered past when it comes to their credit. It isn’t the absolute worst thing to have credit issues—it can happen to anyone and it happens for a lot of different reasons. Regardless of which category you fall into, a secured card can be a very handy tool to have in your financial arsenal.
In this post, you’re going to learn more about secured credit cards, how they work, and if they are a good option for you.
What Exactly Is a Secured Credit Card?
To put it simply, a secured credit card is a credit card backed by an initial cash deposit. This type of card is specifically designed for people who have limited or damaged credit, providing an opportunity to fix some of the issues they may have run into in the past or just an opportunity to get started.
It’s no secret that it can be difficult to get a standard, unsecured credit card. Those types of cards don’t require anything upfront. This can be very risky for banks if you’re someone who has yet to have the opportunity to prove your ability to repay credit that has been extended to you or if you’ve had trouble repaying various loans and debt in the past. Secured credit cards help eliminate that risk for banks when extending credit to you, because you will be required to pay a deposit upfront. That deposit is held as collateral for the entire time you have the secured card.
You are still expected to make payments with a secured credit card; however, if you are unable to do so, the bank can keep your deposit so that they haven’t lost any money. The deposit that you pay upfront doesn’t cover your payments at all, because secured credit cards are not prepaid cards. They are just a different type of credit card.
Secured credit cards are also the easiest type of credit card to receive approval from banks and credit card issuers. Some of them will still have minimum requirements when it comes to your credit score; however, most of them look more at your income, your ability to make payments, and, of course, the size of your deposit.
Depending on the card, they can sometimes have fewer fees and lower rates, which can make them easier for you to use to strengthen your credit. Secured cards generally do not offer rewards, though, and frequently come with higher interest rates. As long as you make timely payments and pay your balance in full each month, interest charges won’t be something you need to worry about.
How Do Secured Credit Cards Work?
Just like with any other type of credit card, you will have to fill out an application for a secured card. The application will collect information about you and your income. You can expect to provide your name, date of birth, social security number, and address. You will also be required to provide details about your income and employment. Some secured credit cards, specifically those for clients with damaged credit, may request contact information for your employer or require you to present pay stubs to help prove your income.
Even though they collect all of this information, most banks will still do a hard pull on your credit. That means that even if you are denied for a specific secured credit card, this inquiry will show up on your credit report. Keep in mind that getting denied for one secured credit card doesn’t mean that you will be denied for all of them; however, it isn’t a good idea to accumulate a lot of hard inquiries on your credit in a short period of time as they can hurt your score even more. It is also best to apply for a secured credit card when you know you will be able to pay for the security deposit.
When you’re approved for a secured credit card, you will be expected to make your deposit before they send you your card. Most secured credit cards only require deposits around $200 to $300, but some of them may allow you to deposit a higher amount if you meet certain eligibility requirements. Your deposit is used to determine your credit limit.
As an example, if you are approved for a secured credit card with a limit of $500, you will be required to deposit $500 in order to receive and start using your credit card. In rare instances and usually if you have a decent credit score already, you will be given a credit limit above your deposit amount.
In most cases, any annual fee for the card will be charged to your card right away. Working with our example of $500, that deposit will cover the opening of your card and the annual fee immediately. So, if the card that you select has an annual fee of $35, you will already have a charge of $35 on your card. That leaves an available balance of $465 for you to use. Not all secured credit cards have annual fees, but when they do, they are typically under $50.
Secured credit cards can be used anywhere that credit cards are accepted. In some cases, such as with hotel deposits, car rentals, or some online services, your secured card may be ineligible. This is determined by whoever is providing the service, not your card issuer. It provides them an extra layer of security, but it also does the same for you! If a rental car company assesses damages beyond your credit limit, they will be unable to charge you, which can lead to more financial trouble later on.
You will receive monthly statements and be expected to make prompt payments on your secured credit card just as you would with any other card. If you do not pay off your full statement balance (meaning that you choose to carry a balance), you will incur interest on the charges you made to your card. Secured credit cards work just like unsecured cards; the only difference is that you’re required to make a deposit upfront.
In the event that you close your secured credit card and have made all your payments, you’ll get your deposit back. Oftentimes, if you make a number of on-time payments with a secured credit card, you can upgrade your card to an unsecured credit card and get your deposit back.
It is important to understand that secured credit cards are not the same as prepaid cards. Prepaid cards may seem similar in theory because you have to add money in order to be able to use them, but they are distinctly different. Even if you use a prepaid card that is issued by one of the major credit card providers, they are not the same because the issuer is not lending you any money or extending any credit to you. Prepaid cards do not report to any of the major credit card bureaus and will not help you establish or repair your credit.
Is a Secured Credit Card a Good Choice?
Yes! If you’re someone who is unable to get an unsecured credit card for any reason, secured credit cards are a great choice. Building credit when you’re just getting started is very important so that you can prove your creditworthiness. Establishing good credit is critical if you’re someone who will eventually want to finance a car, secure a mortgage, and more.
If you’re someone who has damaged credit and struggles with a low credit score, secured credit cards provide you with a great road to better credit. You can use a secured credit card to help you create a positive payment history and shed a better light on your financial responsibility going forward.
It may seem daunting to know that you have to pay a deposit upfront, and that is completely understandable. Even though it can be a little bit of an inconvenience, it doesn’t take away from the fact that secured cards are a great option to help build or rebuild your credit. Also, you should make sure that you’ll be ready to make your deposit when you submit your application; however, some secured credit cards will give you a 30-day window to make your deposit without having to reapply.
Something else that makes secured credit cards a good choice is that you can often increase your credit limit later on. After a few months of making timely payments and using your card responsibly, you can call your issuer and discuss expanding your line of credit by making an additional deposit.
Many major banks offer both unsecured and secured credit cards, so with a demonstrated positive history, you may be able to transition to an unsecured card later on. Even if those options aren’t available to you, the secured credit card is going to give you a chance to create a positive history and help boost your credit score.
Making the Most of Your Secured Credit Card
It goes without saying that credit cards should be used responsibly. If you’re someone who is relying on a secured credit card to repair your credit, you may understand firsthand the problems that can come with biting off more than you can chew. There is always a chance that an emergency is going to come up and you’ll have to rely on your credit card to help get you out of a sticky situation. To make sure you have the credit available to do that, and to keep you on a positive trajectory, you should keep the following tips in mind when you use your secured credit card.
- Try to use your card sparingly or use it for routine purchases you’re accustomed to paying out of pocket. This will ensure that you will always have the funds to pay your full statement balance when it arrives, which will reflect most positively on your credit history.
- Do not fall into the trap of minimum payments. Minimum payments are a great option when you come up short on a given month; however, paying your full balance on time every month is always the best choice. This helps you avoid paying high amounts of interest and demonstrates to your lender that you are responsible with your credit card.
- Stay below your credit limit if you can. We know you got your credit card to be able to use it, but there’s a hidden bit of information that makes this a worthwhile tip to stick to. Maxing out your credit card every month is not a positive habit to get into (even if you can pay it off easily) and the amount of your available credit that you use monthly can impact your credit score. There is no magic number; however, credit experts suggest that leaving a larger percentage of your available credit untouched can help improve your credit. This shows lenders that you are using your available credit responsibly.
- Keep an eye on your credit score. Secured credit cards are designed to help you improve your credit history. Watching your credit score is a good idea because once you have established a good credit history for beginners, or improved your score if you’re repairing, you can think about calling your issuer about increasing your credit limit or transitioning to an unsecured card. You can monitor your credit via one of the many free credit monitoring services or, if you pick the right card, you will get a free monthly FICO score.