If you don’t have a credit history, getting approved for a credit card can be challenging. Here’s where secured credit cards can save the day.
How does a secured credit card work? Keep reading and I’ll explain the basics for using secured credit cards to build – or even to rebuild – your credit history.
What Is a Secured Credit Card?
A secured credit card is an excellent credit-building tool. These cards require a security deposit, usually ranging from $200 to several thousand dollars, depending on the deposit requirements of the issuer. The deposited amount generally becomes your credit limit.
The bank holds on to your deposit until you close your account. This lowers the risk for a credit card issuer. If you don’t pay the bill, the issuer can keep your deposit. If you use the card responsibly, you’ll be able to improve your credit score. When your score gets high enough, you can apply for an unsecured card.
Some issuers have a graduation path where you can upgrade to one of their unsecured cards. But if yours doesn’t, you can apply with a new issuer. In both cases, you’ll get back your deposit as long as you’ve paid as agreed.
Secured vs. Unsecured Credit Card
Unlike a secured credit card, an unsecured credit card doesn’t require a deposit to get approved for the card. The top unsecured credit cards from major issuers are typically used by those who have at least fair credit.
There are some unsecured credit cards available for those with zero or bad credit, but they tend to have high interest rates and fees. That’s why many people turn to secured credit cards even though the cards require a deposit.
How Does a Secured Credit Card Work?
When you get approved for a secured credit card, you’ll receive a credit card that looks just like an unsecured credit card. There’s no visible clue that the card is secured.
The amount of your security deposit is usually equal to the credit limit for your new secured card. You’ll use your secured credit card just like you would an unsecured card. You can use it for purchases everywhere that accepts your secured credit card.
Just to be clear, your security deposit stays in an account with the issuer. You’ll make payments on your balance from one of your own bank accounts. So, you’re actually buying things on credit.
Do Secured Cards Build Credit?
Most secured credit card issuers report your payment history to the three major credit bureaus: Equifax, TransUnion and Experian. If you can’t find confirmation on the card’s home page that payment history is reported, call the issuer to make sure it’s the policy.
When your secured card’s bill comes, you must pay the bill by the due date. If you pay your balance in full, you’ll avoid paying compound interest. If you consistently make on-time payments and keep low balances on your card during the month, your credit score will begin to increase.
Pros and Cons of Secured Credit Cards
Secured credit cards have both pros and cons. Here are a few facts to keep in mind.
- Secured credit cards help you build credit and develop a good credit score.
- Secured cards help you learn how credit works. And since the credit limits are on the low side, it helps to minimize your risk of getting into debt.
- Some credit card issuers will promote you to an unsecured credit card. Not all secured card issuers have unsecured versions, but many of them do.
- When you’ve built a good credit history and you’re ready to upgrade to an unsecured card, you can get a refund of your deposit.
- Many secured credit cards offer rewards and benefits.
- You have to make a security deposit, and this ties up your money for the life of the secured card.
- Some secured cards have many fees, so you have to read the fine print carefully.
- You’ll probably have a low credit limit, but this is often a good thing while you’re getting comfortable using credit.
- Some secured credit card issuers don’t offer unsecured versions, which means you have to apply for an unsecured card from another issuer.
I know it’s difficult to build credit or to come back from a poor credit score. A secured credit card can be a great option, but be sure you read all the disclosure statements and understand if there are fees involved. After about a year of responsible use, you’ll probably have at least a fair FICO score – 580-669 – which is good enough to make the leap to an unsecured credit card.
