You may be wondering if getting a secured credit card is a good idea.
If you’re considering secured credit cards, you might be comparing different options to find the best line of credit for you.
Secured credit cards are great options if you can’t get approved for an unsecured credit card, but they work a little differently. You put down a security deposit to open a secured card, usually a few hundred dollars, that acts as your credit limit and collateral for your credit card provider.
The main reason to consider a secured credit card: you don’t need good credit to apply for most secured credit cards, and you can build up your credit with responsible spending. And some secured cards let you graduate to an unsecured card as you make payments on time.
Beyond these basic reasons to consider secured credit cards, here are five signs you might need a secured credit card.
1. Your credit card application was rejected.
A secured credit card is a great option if you have poor or no credit. Because you have to put down a security deposit before getting your card, providers are more willing to make you a customer.
To be clear, you won’t be approved for every secured card if you have poor credit. However, it’s much easier to get this type of card than it is to get an unsecured card. There are even secured cards that require no credit checks.
Green Dot primor® Mastercard® Gold Secured Credit Card
Low fixed interest rates with no penalty rate.
- Annual fee: $49
- Purchase APR: 9.99% fixed
2. You have a poor or fair credit score.
Maybe you applied for an unsecured credit card but weren’t happy with the perks or fees. You might find that your options for secured credit cards offer better terms than the unsecured cards you can qualify for.
A secured card can also help bump up your credit score to apply for the best unsecured cards. This is the single best reason to apply for a secured credit card: to build — or rebuild — your credit.
The process is simple: Just use your card regularly and pay off your balances by the due dates. As you consistently make timely payments, you’ll slowly see your credit score go up. Make sure you choose a secured card that reports regularly to major credit bureaus, which most do.
3. You have no credit history.
Students, immigrants and those with no previous credit history have few options to start building credit. without knowing how you handle your finances, lenders will be wary of approving you for your first credit card.
One of the best ways to start a credit history is with a secured credit card. Your deposit acts as collateral, which means providers don’t have to worry about getting paid back for any purchases you make.
For non-US residents, consider cards that don’t require a US bank account or US residency.
4. You filed for bankruptcy.
Your credit history isn’t ruined after filing for bankruptcy. In fact, a bankruptcy only remains on your credit report for 10 years.
You can start rebuilding your credit right after filing for bankruptcy. If you’re worried about rejections lowering your credit further, consider applying for cards that offer no credit checks or guaranteed approval after meeting certain requirements.
Secured cards help improve your credit score by decreasing your credit utilization ratio, or the total amount of credit you have.
Here’s an example:
- Say you currently have a card with a $500 credit line. If you’re carrying a $250 balance, your credit utilization is 50%.
- If you get another credit card with a $500 credit limit, you now have $1,000 of total credit. But you still owe only $250 between your two cards. That means your credit utilization just decreased to 25% — and all you had to do was open another card.
Credit bureaus (the organizations that track your credit scores) like to see a low credit utilization ratio. It implies that a borrower isn’t desperate for credit and can capably manage his or her debt. Because it’s fairly easy to get a secured card, you can notch a quick win for your credit utilization.
5. You want to work on your financial habits.
If your credit score isn’t where you want it to be, you may have poor financial habits you’d like to change. A secured card is a great starting point.
Crucially, you can control how much to deposit — which means you can limit the amount you spend on your card. Operating within a low credit limit, you can learn how to use your card wisely. And since you can’t spend too much at a time, you’ll learn how to consistently pay off your balances.