A secured credit card is a good alternative for people who can’t get a regular credit card—or don’t want one. If you’ve ever had some bad luck, like you’ve lost your job, faced huge medical bills or declared bankruptcy, this type of credit card can help you get your credit score back on track.
Secured credit cards are also an excellent way for people who may not have an established credit history, to start building one. After as little as six months, you will have established a credit score that will keep going up, if you act responsibly.
Several companies offer secured credit cards with a variety of terms, conditions and interest rates. We compare a variety of cards so that you can pick the best card for your financial situation. Additionally, secured credit cards function the same way as regular credit cards do, so retailers won’t know that you are using a secured credit card or a regular, unsecured credit card.
The difference between secured credit cards and other types of credit and debit cards is mostly behind-the-scenes. You make a deposit to the credit card’s bank account as security for the amount of credit you get. Usually, the deposit is 50-100 percent of the credit line you receive. If you’re trying to build up credit, you can make a small purchase each month on the credit card and simply pay off the balance when the monthly statement arrives.
On one hand, it seems a bit counterintuitive that if you have the cash on hand to pay for something, why not just pay cash? Yet, on the other hand, carrying around a wad of cash is asking for trouble, it’s inconvenient and you can’t buy anything online that way. In today’s world, it is simply not possible to operate without a credit or debit card—and the best way to demonstrate your creditworthiness is to build up your credit with a secured credit card.
Without a credit history, you won’t be able to get a mortgage on a home or obtain an emergency loan if you need one. Forget trying to buy anything online without a debit or credit card. Secured credit cards, used responsibly, will help you quickly build your credit score back up so that you can eventually obtain the unsecured credit you deserve.
Opening A Secured Credit Card
The process is fairly easy and fast:
- Most card companies will let you apply online and give you a decision within 24 hours
- Make a deposit into a bank account held by the bank issuing the secured credit card, usually a minimum of $200
- The bank keeps this deposit as collateral, or security in exchange for issuing a credit card to you
- The bank will let you charge between 50-100% of the deposit you made into the account
- You can use the card like any other credit or debit card for in-store and online purchases
After you make a purchase, you will receive a monthly statement for the purchases you’ve made during the month. You should pay the statement on or before the due date and try to make a payment in full. If you do not pay the bill on time, the bank can take the money from your security deposit and apply it towards the amount you owe.
Using A Secured Credit Card Responsibly
Using a credit card responsibly, can help you rebuild your credit rating or establish new credit. If you have a card already, being responsible with a newly-issued card helps your credit score improve overall.
Start out by using the secured credit card to make small purchases during monthly billing cycles that you know you will be able to repay when the bill is due. We suggest charging no more than $10-20 when you start out, but use the card every month. If you don’t have an “active” card, then there is nothing for the credit card company to report to the bureau. If there is no activity, there is no opportunity to improve your performance from the last month.
Make sure that you pay the entire balance in full each month. If you pay the balance in full, you will not have to pay interest on any outstanding balance. Remember that the goal is to not charge any more than you can afford to pay back in full at the end of the month. This prevents you from paying interest, which can be extremely high—double-digit high—on these types of cards.
The best way to ensure that you don’t forget to make the payment is to sign up for automatic payments from your bank account. Don’t forget that because you have a secured credit card, secured by your own money, the bank can take the fee for any late payment or interest payment, out of your security deposit. When the bank takes funds from your security deposit, you are effectively lowering your credit limit and borrowing your own money. This looks bad to the credit reporting services and negatively affects your score. This is exactly the opposite of what you are trying to do.
After a few months, when the credit scoring companies start receiving information from your credit card company about your payment history, you’ll start to see your score improve. You can subscribe to a credit scoring service to monitor the changes. After about 18 months, you should see improvement in your existing credit score or have earned a very high score if you started from scratch.
Is There A Downside To Secured Credit Cards?
The downside to secured credit cards is that they can carry higher fees than unsecured or regular credit cards. Compare what card issuers charge for the following:
- First application fee
- Annual service fee
- Interest rates at opening, if you miss a payment or make only a minimum payment
- Monthly account maintenance fees
- Increasing your credit limit, even if you did not request it
- Penalties and fees for late or missed payments
If you fail to pay your credit card bill for several months, the credit card company will view you as in default of your obligation to pay them back. After following set legal procedures, the credit card company can use the deposit you made previously as security and deduct the amount of money you owe. The company will also close your account, keep the remainder of your security deposit and report your nonpayment to the credit bureaus.
Secured credit cards work very well for establishing an initial credit score or repairing your existing credit. However, you must be responsible and make your payments on time and in-full for them to be most effective.