These credit-building cards can work for you in a few ways.
Having a good credit history is paramount when it comes to larger commitments like renting an apartment or taking out a mortgage. But building credit can be difficult for those without the credit score necessary to obtain a credit card in the first place. In this event, a secured credit card offers an accessible path to build better credit and qualify for the credit card you want.
What types of credit cards are out there?
Secured credit cards are just one of several types of credit cards available, though the exact number of credit card types depends on how you want to categorize them. For example, secured and unsecured credit cards are the two primary types of credit cards, though other types of credit cards might include travel or rewards cards.
No matter the type of credit card, 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.
How do secured credit cards work?
In practice, secured credit cards work much like unsecured cards: You build your credit score by making purchases and paying your balance on time each month. However, when it comes to secured cards, there are a few differences to note:
- They require a security deposit.
Since most unsecured credit cards require a decent credit score, you might find approval difficult if you’re only just starting to build credit or are recovering from poor credit. Secured cards solve this issue by requiring a security deposit before you can open your account. This serves as a “collateral” that your lender can collect on if you default on payments.
- They offer a limited line of credit.
When you open a secured card, the money you deposit as collateral — usually between $200 and $2,000 — often becomes your line of credit. After a few months of on-time payments, you may be eligible to increase your limit. On rare occasions, your credit limit might be higher than your security deposit.
- They’re designed to help.
Most secured cards report your activity to all three credit bureaus: Experian, Equifax and TransUnion. Many secured cards also offer monthly FICO score checks so you can track your progress.
- They offer fewer features and poorer terms.
Unlike unsecured cards, secured cards rarely offer additional perks such as cash back or travel insurance. What’s more, interest rates and other fees on secured cards can be high.
- In time you may 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. Some secured cards offer opportunities for graduating to an unsecured version of the card provided you show financial responsibility over a certain period of time.
- Annual or maintenance fees.
Some secured credit cards don’t 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 rewards programs, lower APRs and more.
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. If you plan on using these features, consider how the fee will 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.
- 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. There are even some secured credit cards that don’t require a credit check, which could prove helpful if you have a particularly poor credit history.
- 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.
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.
- Personal information. Name, Social Security number, phone number and birthday.
- Housing information. Address, type of residence, rented/owned and how long you’ve lived at your home.
- Financial information. Bank, accounts, investments etc.
- Income information. Employer, position, income etc.
- 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.
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 receive 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.
Compare secured credit cards
Who benefits from secured cards?
Secured credit cards most benefit those looking to rebuild a poor credit score or those without any prior credit history whatsoever. Students, new immigrants, those who have filed for bankruptcy and those who misused credit cards in the past are all ideal candidates for a secured credit card.
With that said, it’s still possible to be denied a secured credit card, even if you can manage the minimum security deposit requirement. It’s doubly important to stay on top of your payments if you’re building credit with secured credit cards.
How can secured cards help improve your credit?
Like unsecured credit cards, you’ll improve your credit with secured cards by using the card responsibly, staying on top of your statements and paying your bills on time. The high APRs and other fees should also help discourage you from keeping a balance.
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 credit cards are always secondary to unsecured credit cards when it comes to building and utilizing credit. As such, they should be one of your first fallback choices if you’re denied an unsecured credit card.
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 card, 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 they 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:
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:
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.
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:
What to watch out for
Secured credit cards are a terrific option for building or rebuilding your credit score. However, they still carry the same risks associated with unsecured credit cards, including:
If you’re looking for a credit card, but have poor or no credit history, compare secured credit cards that fit your financial needs. Look out for high APRs and fees, spend responsibly and pay your monthly bills on time to build your credit. In time you’ll be able to start applying for a cheaper, unsecured card.