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Maybe you’ve trashed your credit or maybe you’ve never built credit at all. Either way, a secured credit card is an excellent way to start building it up, so long as you manage it responsibly, of course. What is a secured credit card, you ask? Well, simply put, a secured credit card requires cardholders to put down a cash deposit that serves as (or “secures”) their credit limit. These deposits usually run around $200 to $500, but some secured credit cards allow people to put down a bigger chunk of money.
Secured credit cards are primarily meant to help people who can’t qualify for a traditional credit card or installment loan demonstrate they’re able to repay financing as agreed. The best secured credit cards, in fact, have built-in credit reviews, usually within six months to a year. If the issuer sees the cardholder has made all their payments and kept their balances low, they’ll generally offer an upgrade to an unsecured piece of plastic. But let’s not get ahead of ourselves: First, let’s break down everything you need to know about secured credit cards.
People can go ahead and apply for a secured credit card the same way they would any other card, but, as we mentioned, they’ll be required to put down a minimum security deposit as upfront as collateral. That security deposit is meant cover the issuer in case of default. Remember, secured credit cards are geared towards customers with no-to-low credit, meaning the bank considers them a risky investment and is asking for a security deposit to serve as a bit of insurance. Your security deposit generally serves as your full credit limit. So, if you put down $300, you’ll be able to spend up to $300 on the card. But policies vary by issuer to issuer and a few may approve you for a limit that’s bit higher than what you put down, at least after a few on-time payments.
That brings us to another important component of secured credit cards: You’ll still need to be approved for both the card and a particular credit limit, so, yes, the card issuer will do a credit check. To ensure that you qualify for the best deal, consider taking these steps.
After you’re approved and put that deposit down, secured credit cards work mostly the same way that unsecured credit cards do. You use the card to make purchases (up to your credit limit, of course) and you’re expected to make at least a minimum payment each month. That payment, however, isn’t covered by your security deposit. Instead, you’ve got to use other funds to cover what you owe — just as if you were borrowing money directly from the issuer. If you don’t make a monthly payment, the issuer could use the security deposit you laid out to cover any outstanding purchases.
No — and this is a particularly important distinction to drive home. While you put an upfront deposit down to fund a prepaid card, you’re actually spending the funds from that deposit each time you swipe, similarly to how a debit card pairs with a checking account. A secured credit card, on the other hand, functions like a traditional credit card. Even though you’ve put a deposit down, as we mentioned earlier, that deposit isn’t being used to fund your purchases. You’ll have to pay them down using new funds. Moreover, while prepaid cards can seem like a useful way to budget, given they provide the same limitations as secured credit cards, they don’t build credit. So, if you’re looking for a new payment method to boost your credit scores, a secured credit card is the better fit, which brings us to …
Even if you have good credit, there are reasons why a secured card may be a good fit for you. One of the secured card’s best features is its limitations, so you might like a secured card if you are:
Of course, secured credit cards aren’t for everyone. Let’s break down the pros and cons to help you decide if they’re your best option.
When you’re shopping for a card, be sure to choose one that sends your payment activity and account information to all three of the major credit bureaus – Equifax, TransUnion and Experian. This allows your credit score to benefit most from your credit usage and on-time payments.
Think of the card not as a convenience so much as a way to build credit. To get the most from it, it’s important to know how credit scores treat your usage and payment activity.
One major credit score factor is your credit utilization rate, which compares how much credit you’re using with the credit limit on your card. To help build your credit, keep your utilization rate low. Do that by carrying a balance that’s no more than ideally 10% to at least 30% of your credit limit. Running up your card balance hurts your ratio, damaging your credit score. For example, if your credit limit is $300, keep your balance under $75. If your limit’s $200, keep the balance under $50. If it’s $500, don’t go over $125. Note, though: You don’t have to run up debt to have good credit. It’s perfectly fine to pay your balance off in full each month.
Your payment history also affects up to 35% of your credit score. Late payments bring down your score, while on-time payments keep your credit score healthy.
Again, it will vary from issuer to issuer, but, assuming you’re making all your payments on time and keep your credit utilization low, you should still expect to wait at least six months to a year for a formal upgrade. Some issuers outline in their application how you can go about qualifying for a traditional card or, at least, a higher credit limit.
Recommended Non-Secured Credit Card
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For instance, Capital One grants it Secured Mastercard (see full review here) account holders access to a higher credit line after they make their first five monthly payments on time with no additional deposit needed. (The Capital One Secured Mastercard carries annual fee and a APR; see full card agreement for details.) And the BankAmericard Secured Card allows cardholders to qualify for a security deposit refund after 12 months of use. (That card carries a $39 annual fee and a variable APR; again, see full card agreement for details.)
At publishing time, Chase Freedom Unlimited and Capital One Secured MasterCard credit cards are offered through Credit.com product pages, and Credit.com is compensated if our users apply for and ultimately sign up for any of these cards. However, this relationship does not result in any preferential editorial treatment. This content is not provided by the card issuer(s). Any opinions expressed are those of Credit.com alone, and have not been reviewed, approved or otherwise endorsed by the issuer(s).
Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.
