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Secured credit cards
Secured cards allow people with bad credit to put down a deposit in order to get approved and start building a more positive credit history. They're all but extinct in the UK. Here's how they work and other financial products that can fulfil a similar function.
Although popular across the pond, secured credit cards have gone the way of the dinosaur over here. Thankfully alternative options exist – and which is suitable for you will depend on your situation and your aim.
What is a secured credit card and how does it work?
Secured credit cards are designed for people with bad credit who want to build their credit score. These credit cards require a deposit, referred to as a “security sum”, which is held by the card issuer while you have the card, and returned to you when you close the account.
Your credit limit is generally equal to the security sum that you put down when you apply. That means the card issuer can never be out of pocket. It also makes these cards a bit of an unhelpful product: Can’t borrow money? Why don’t you lend a card issuer some instead?! In fact, the only reason you’d take out a secured credit card is to make it possible and affordable to borrow money at some point in the future, once your credit score has improved.
Like any credit card, secured credit cards require you to make minimum monthly repayments towards any outstanding balance, and you’ll incur interest on any unpaid balance. However, there is an interest-free period if you pay your account off in full each statement period. Using the card to withdraw money from a cash machine will incur interest charges immediately.
If you’re offered a secured credit card, you’ll need to pay the security sum upfront before you receive the card. Your security sum can’t be used to make repayments, but if you fall behind on your minimum repayments, the card issuer could use some or all of your security sum to pay off any outstanding balances on your account.
These days, secured credit cards are still available across the pond in the US but are no longer common in the UK, though Capital One has issued secured cards in the past, and Tymit Booster operates on similar principles.
Why would I want a secured credit card?
With a secured credit card, your monthly repayments are reported back to credit reference agencies, so provided you use your secured card responsibly (staying within your credit limit, making all repayments on time etc.) it’s likely to have a positive effect on your credit score. Using a credit card rather than a debit/prepaid card also gives you access to purchase protection under Section 75 of the Consumer Credit Act for items individually worth £100-£30,000.
Secured credit cards could be a step in the right direction, but only if you have the money to pay the deposit in the first place. Once you’ve become a master of your credit handling capabilities and begin to see improvements in your credit score, you may no longer need to be tethered to a card with a security deposit – meaning you can apply for an unsecured card.
What are the alternatives for people with poor or limited credit?
Having a poor credit rating is more common than you might think. Whilst bad credit can reduce your chances of getting much-needed finance, the good news is that you have options for restoring your credit rating and demonstrating to lenders that you are responsible with money.
Low credit score and sometimes need to borrow? Consider a credit builder credit card
These cards are designed for people with a damaged or limited credit history, but unlike secured cards, they don’t require money upfront. You build your credit score by simply using the card responsibly, and in many cases, can benefit from credit limit reviews after just 4-6 months. You’ll need to go through a credit check as part of the application process, but the card issuer won’t be expecting perfection.
These cards do charge a higher interest rate than mainstream cards (due to the higher perceived level of risk involved) so you should aim to pay off the balance in full every month.
Just want to boost your credit score ASAP? Try other credit-building tools
There are plenty of innovative fintech firms around that are always on the lookout for new ways to help people build their credit scores. Services like LOQBOX and Portify allow you to set up a direct debit to save a regular amount each month, which is then treated as if it were a finance repayment, with each repayment being reported to a credit reference agency.
There are also schemes such as CreditLadder which allow your rent payments to be reported back to credit reference agencies and establish that you can responsibly meet regular payment obligations.
Just looking for a payment card and don’t need credit? Try a prepaid card
With a prepaid card, you can decide how much money to “load” it with upfront, but there are usually a few limitations (such as an overall maximum, and a maximum amount you can withdraw in one go). Essentially, think of a prepaid credit card as a direct alternative to having cash in your wallet, which you use for day-to-day spending. Prepaid cards don’t normally have any effect on your credit record, because there’s no credit involved.
However, a few innovative prepaid card issuers, such as Cashplus, do offer a credit-building service, but it comes at a cost. They do this by essentially lending you a year’s worth of account fees, which you’ll then repay in monthly instalments.
Will I need a credit check to get a credit card?
Yes, you’ll almost certainly need a credit check in order to get a credit card. but the good news is that almost all lenders will let you use an online “eligibility checker” before you apply. This quick check will provide you with a good indication as to whether or not you’ll get approved for the credit card you are interested in.
What’s more, completing this initial eligibility checker won’t have any impact on your credit score, as it’s considered a “soft” credit search. Eligibility checkers can be extremely helpful for people with bad credit to gauge their likelihood of getting a certain credit card, but it’s not a guarantee that you’ll be approved.
Approval for any credit card will depend on your status. The representative APRs shown represent the interest rate offered to most successful applicants. Depending on your personal circumstances the APR you're offered may be higher, or you may not be offered credit at all. Fees and rates are subject to change without notice. It's always wise to check the terms of any deal before you borrow.
How can I compare unsecured credit cards for bad credit?
If you’ve got a bad credit rating and are looking at specialist credit cards, consider the following factors when comparing your options:
- Eligibility. Each card issuer will have its own criteria that applicants will need to meet – covering things like your age and income. Almost all providers now offer a free “eligibility checker” tool (although they may call it something else), so that you can get a good idea of whether or not you would get approved for the card before you apply, without affecting your credit score. You shouldn’t apply for a card unless you’re confident that you’re eligible because multiple applications for credit can have an adverse effect on your credit score and can put off potential lenders.
- Interest rates. This is the cost of borrowing. Any outstanding balance that you carry from month-to-month will incur interest. However, if you can clear your balance in full each month then with most cards you’ll be able to avoid interest altogether – credit cards typically come with up to 55 interest-free days on purchases if you don’t carry a balance month-to-month.
- Credit limits. Credit limits are invariably tailored to the individual, but many issuers are upfront about their minimum and maximum limits. Some issuers also promise a credit limit review after a specified number of months (provided you’ve made all repayments on time).
- Rewards and perks. Although credit cards for bad credit don’t typically come with much in the way of perks, a few do. Some issuers, including Asda and Tesco, let you earn reward points on all your spending on your card.
- Fees. It’s important to check what fees apply with the card you’re interested in. These can include annual or monthly account fees, cash advance (withdrawing cash using the card) fees, overseas transaction fees and others.
The “dos and don’ts” of credit cards for bad credit
- Do explore credit cards such as credit builders – designed to help those with bad credit to rebuild a positive credit history.
- Do use an eligibility checker before applying for a credit card.
- Do make credit card repayments on time, every month.
- Don’t ever miss a payment, as doing so could mean it will become even harder to get credit in the future.
- Don’t apply for too many credit cards over a short period of time, as this can appear too risky for lenders.
- Don’t leave unused accounts open. If you have several accounts but are not currently using them, think about closing them.
- Don’t use your credit card to withdraw cash from an ATM, as you’ll likely be hit with additional fees.
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