Tips for choosing the right card, how they work and everything in between
Credit cards have a wide variety of applications and often come in handy when debit cards and cash just don’t cut it. From renting a car to booking a flight, credit cards are essential for travel and equally as beneficial for everyday purchases.
For larger commitments like renting an apartment, financing a car or taking out a mortgage, lenders want to determine your creditworthiness. They’ll look at your repayment history and credit score to determine the likelihood of you defaulting on your payments. Credit cards are often the most efficient way to build creditworthiness, which is a bit difficult, since so many cards require you to have a positive credit history before you can be approved.
This is where secured credit cards come in.
How do secured credit cards work?
Secured cards work much like unsecured cards: they’re easy to use, get you money when you need it and can help build your credit.
- Access a line of credit. When you open a secured card, you make a deposit that works for your budget— usually between $200 and $2,000 — that becomes your line of credit. After a few months of ontime payments, you may be eligible to increase your limit, building credit even faster.
- Build your credit. Most secured cards report your activity to all three credit bureaus: Experian, Equifax and TransUnion. Many secured cards offer monthly FICO score checks so you can track your progress.
- Make ontime payments. Like unsecured cards, you’ll receive a monthly statement of your purchases, and are required to make payments or pay it off in full. Interest rates on secured cards can be high, so paying the bill off in full every month helps to avoid paying more for your purchases.
- Graduate to an unsecured card. Using your card regularly and responsibly can help your credit score increase. A 670 score is considered good credit, and can help you qualify for an unsecured card. Be careful of cards with lower application standards — they often charge high fees.
What types of credit cards are out there?
Secured credit cards
Secured credit cards are credit cards that work just like any standard credit card, except you make a deposit to act as security when you apply. Your credit limit is usually equal to your deposit, reducing the lender’s risk because they can take the money from your deposit if you don’t pay your bill. Every month, you can spend up to your established credit limit, and it resets once you pay off your bill. If you decide to cancel your card, you’ll get your initial deposit back.
Partially secured credit cards
Partially secured cards are between secured cards and the standard unsecured cards. These cards generally require a deposit to secure the credit card, but usually allow for a credit line greater than your deposit. This allows lenders to minimize their risk while offering an opportunity for customers to build credit. These types of cards are ideal for those who have established credit, but don’t quite have a high enough credit score for an unsecured credit card.
Unsecured credit cards
Unsecured credit cards are the most common type of credit cards. They are not secured by collateral, meaning they don’t require a deposit. When you’re approved for an unsecured card, you have a credit limit which is essentially a line of credit from the lender. You’re responsible for paying off your balance each month, otherwise you’ll accrue interest on your purchases.
If you neglect to pay your bills, your credit score is negatively affected and your outstanding balance may be sent to a collection agency. Since most unsecured credit cards require a decent credit score, approval is hard for those just starting to build credit.
Who benefits from secured cards?
Anyone can benefit from a secured credit card, as they’re a less risky way to build or rebuild a positive credit history. Students, people who have filed for bankruptcy and those working to overcome debt could benefit from secured cards.
7+ secured credit cards starting at 9.99% APR
An initial deposit allows you to limit your spending while building credit. The nature of the card limits the risk of credit card debt, but it’s still important to stay on top of your payments to ensure a timely and inexpensive path to positive credit.
How can secured cards help improve your credit?
Improve your credit with secured cards by using the card responsibly, staying on top of your statements and paying your bills on time. Your credit limit is set by the amount of your deposit, helping you keep your spending in check. The high APRs should discourage you from keeping a balance. Many cards often come with free credit reports to help you keep track of your progress on your journey to positive credit.
Once your credit score is high enough, you could be eligible for an unsecured card. This can help you build credit quicker, often with added benefits like signup bonuses, lower fees and rewards programs.
When are secured cards better than other options?
Secured cards are often the cheapest ways to get money fast. It also can help get you out of the cycle of poor credit.
Personal loans offer money quickly, but often charge $100s of dollars in interest. Secured cards give you quick access to cash, and the opportunity to avoid interest by paying your balance each month. Though you pay an initial deposit to your secured care, you usually get it back once you close the card.
Prepaid debit cards are another option that require a deposit. The problem with these are that using them won’t help your credit. Prepaid credit cards don’t report your payment history or activity to the three credit bureaus.
Tips for choosing the right secured card
There are an astounding number of secured card options, each catering to different needs. To determine the best card for you, consider what you’ll be using the card for and how it could benefit you. Here are a few factors to keep in mind when choosing a secured credit card:
- Annual or maintenance fees. Some secured credit cards do not have an annual or monthly fee. These are usually bare-bones cards, but that’s not a bad thing if you’re just looking to build credit. Though paying an annual fee could open the door to reward programs, lower APRs and more.
- APR. The APR is an annual percentage rate, or the interest rate you’ll pay on your purchases. Some cards offer a lower introductory APR, while others impose a penalty APR for late or declined payments. Avoid paying APRs by spending only what you can afford and paying your balance in full each month.
- Transaction fees. Transaction fees refer to things like balance transfers, cash advances, foreign transactions and late fees. See if you plan on using these features to judge if the fee would affect you.
- Pick the right provider. Some banks and credit unions are better than others. Seemingly amazing cards can turn out to be a nightmare if the issuing bank is a hassle to deal with. Research the card providers and take into account customer reviews.
- Rewards program. Rewards programs are rare on most secured cards. If you come across one, make sure it isn’t simply an effort to downplay other negative features like increased fees or a higher APR. Compare the card to a similar one, and if there’s an annual fee, consider whether the rewards are worth the cost.
- Interest on deposit. Some secured cards will pay you interest on your initial deposit, acting like a savings account. Read the terms and conditions or call customer service if this is a factor that’s important to you.
- Authorized users. If you plan on letting a family member or significant other use your card, check with the lender to make sure this is allowed. Some lenders allow you to apply for an extra card at no extra cost, but others will charge a flat fee.
What you need to know about applying
Most companies make applying for a secured credit card pretty straightforward. Here’s what you need to know:
- Little or no credit. If you have poor or fair credit, approval is easier for secured cards. You can usually find the recommended credit score for each card on its website.
- Ways to apply. You can usually apply for a secured credit card online, by phone, or through the mail. Online and phone applications are usually fastest, but many cards take applications by mail if you’re not in a rush. Some cards require you to be a member of the credit union or state department.
- Timing. Approval may be instant if you apply by phone or online, but expect it to take closer to a week or two to get your card in the mail.
- Soft and hard credit inquiries. Most lenders don’t check your credit history. Some could make a soft inquiry on your credit history, but this doesn’t affect your credit. Unsecured cards will do a hard pull, negatively affecting your credit.
Why does this matter? Multiple hard inquiries in a short time could lead lenders to consider you a high-risk customer. If you’re applying for multiple credit cards at once, it may suggest that you’re short on cash or preparing to rack up a lot of debt.
Secured credit cards that don’t require a credit check
What you’ll need to apply
There’s a bit of information to provide when you apply for a secured credit card. Most applications require:
- Personal information. Name, Social Security number, phone number, birthday.
- Housing information. Address, type of residence, rented/owned, how long you’ve lived at your home.
- Financial information. Bank, accounts, investments, etc.
- Income information. Employer, position, income, etc.
What to watch out for
- Annual fees. Annual fees can range from $0 to 25% of the initial credit limit. Some lenders charge the annual fee up front, decreasing your available credit. Ideally, look to minimize the amount you pay towards annual fees in order to save money in the long run.
- APRs. Many secured cards have high APRs. If you plan on carrying a balance, look for a card with the lowest APR. Be aware of introductory and penalty APRs which directly affect the interest rate you’ll pay on your purchases.
- Transaction fees. Watch out for fees for balance transfers, foreign transactions and late penalties if those features are something you’ll use. Check the terms and conditions of your card in order to avoid being charged any unnecessary fees.
- Monthly fees. You could pay monthly maintenance fees on top of the annual fee, or pay for paper bills. Be aware of any fees before you apply so you’re not blindsided when you recieve your first statement.
- Unsatisfactory lenders. Despite decent card reviews, some issuers and lenders have a poor reputation among customers. Complaints can range from communication issues to undisclosed fees. Consider what other users are saying before jumping into an agreement to avoid frustration with a potential lender.
If you’re looking for a credit card, but have poor or no credit history, secured cards can help. Look out for high APRs and fees, and pay your monthly bills on time to build your credit. Over time you could start applying for a cheaper, unsecured card.