If you’re thinking about getting a secured card, you’ve come to the right place. The following is a comprehensive guide that we created to help you learn everything about these cards, including the benefits and drawbacks of using one, and how they can help you build or improve your credit score. You’ll also learn about the security deposit requirements, limitations, rewards, common mistakes to avoid, what to look for when choosing a secured credit card, what to do if your application is denied, and much more. Read on to gain a clear, detailed insight into secured credit cards, so that you can make an educated decision about getting one.
Why Do People Get a Secured Credit Card?
It can be difficult to get a credit card if you have no credit score whatsoever. It can be even tougher to get approved if you have a poor credit history. Past mistakes can follow you well into the future, raising flags and preventing you from getting a loan when you need it.
To establish good credit, you need a credit card. However, you can’t get a credit card if you don’t have good credit. It’s a real catch-22, so what can you do?
You can get a secured credit card, and either improve your existing credit score or build a new one from scratch. This is precisely why people get these cards.
If you’re a subprime borrower, that is, if you carry a high credit risk for lenders, you can easily get a secured credit card, and starting building or strengthening your credit score.
What Is a Secured Credit Card Used for?
As already mentioned, a secured credit card is used for building or rebuilding credit. You use it just like a regular credit card, but you need to make a security deposit first.
Your card issuer needs the deposit as collateral to fall back on so that they have a guarantee that they won’t lose money if you fail to pay back the amount you borrowed.
The primary purpose of these cards is to help you build or improve your credit score to the point where you’ll be able to qualify for a regular, unsecured credit card. Once you do, you can get your security deposit back.
10 Essential Things You Need to Know About Secured Cards
Now that you know what secured credit cards are, and what their main purpose is, take a look at the key things about them, so that you can know whether or not they’re right for you.
1. Who Can Get a Secured Credit Card?
Secured credit cards are made specifically for individuals who either have bad credit and need to improve it or people with no credit history at all.
Therefore, a secured credit card is an excellent choice for:
- People with no credit history – If a borrower has no credit history that a lender can use to make a risk-free decision, they can apply for a secured credit card, and start building their credit. It will help them create a credit history that lenders can later use to determine whether or not the borrower can effectively handle a loan.
- People with a low credit score – If a borrower has made mistakes in the past, that is, failed to repay their debt on time and in full, they have a low credit score. A low credit score indicates bad credit, which is why lenders are not very willing to lend money to such high-risk borrowers.
- Students – While students are eligible for student credit cards, getting a secured credit card can be a smart choice for building good credit. They can have more than one account (tradeline) on their credit report, which greatly helps with establishing good credit.
- People who have declared bankruptcy – If someone has declared bankruptcy in the past, getting a secured credit card with no credit check is a great way to improve their credit score.
2. How Long Does It Take to Create a Card?
Creating a secured credit card doesn’t take longer than a couple of days. The process is very simple, as all you need to do is choose your secured credit card issuer, and submit an application.
To apply for the card, you need to provide your personal information (name, address, social security number, etc.), as well as your income and employment information. The issuer will then take several days to thoroughly check your credit score to see if you may have any unpaid debts.
If you meet all the necessary requirements, you’ll get your approval. You then need to provide a mandatory deposit as collateral, which will equal your credit limit. Once you do, you’ll instantly have your account, but you’ll have to wait for your card to arrive in the mail within 2-3 weeks following the approval.
Report your new secured credit card to the major credit bureaus before you start using it.
Some secured credit card issuers don’t report to all three major credit bureaus (Equifax, Experian, TransUnion), so make sure you check whether or not your chosen issuer does. Find one that will report your good behavior every month.
Reporting to all three major credit bureaus is crucial for building or improving your credit score, as your credit report will include your entire payment history.
3. What Are the Advantages of a Secured Credit Card?
Secured credit cards have some excellent advantages over their unsecured counterparts. Here are the most important to consider.
- A Very Easy and Quick Approval Process
Apart from proof of not having any unpaid debts, all you need to provide to obtain a secured credit card is a security deposit. This is precisely why the process of approval is swift and simple. By getting the required deposit, your issuer eliminates any potential risk that could negatively affect them, since they can keep your money if you fail to provide payments on time.
- The Deposits You Make Can Be Refunded
Apart from the initial mandatory deposit, you can make more deposits later if you wish to increase your credit limit. Whatever the case, your card issuer will refund all your deposits once you’ve entirely paid off your balance and closed your account, provided that you’ve made all your payments on time.
- Reasonable and Affordable Fees
Average annual fees (during the first year) for secured credit cards range from $29-$49+. Most secured credit cards come with much lower annual fees for subsequent years.
However, there are also secured credit cards with absolutely no annual fees. There are other fees to consider, but they’re very reasonable and affordable.
Be punctual with your payments and clear them every month. Not only will this help you get all your deposits back, but it will also help you build good credit. You also won’t have to worry about the interest rates.
4. What Are the Disadvantages of a Secured Credit Card?
Although secured credit cards come with great benefits, they do have a few disadvantages worth considering.
- An Advanced Deposit Is Mandatory
As you already know, you must make a deposit to obtain a secured credit card. Although you’ll get it back once you pay off your balance in full, you still need to provide it up front.
This can be a deal-breaker if you simply don’t have the necessary money at hand.
- A Low and Restricted Credit Limit (in most cases)
Another disadvantage of secured credit cards is a very low credit limit. The limit usually ranges between $300-500, but some issuers allow a much higher credit limit.
This limit is determined by the deposit you put down in the first place. If you put down a deposit of $500, your credit limit will be $500.
You can increase your credit limit by putting down more deposits. How big of a payment you would need to make depends partly on you, and partly on your credit card issuer, as each allows different minimum and maximum deposits.
However, some providers allow a credit line increase after a particular time period of on-time, full payments. So, you might not need to make additional deposits to increase your credit limit.
To optimize your credit score, you need to keep a good balance, that is, maintain a good credit utilization ratio. This means you should use less than 30% of your total credit limit every month. For instance, if your limit is $400, try and keep your balance below $120. If you go over it, your credit score can significantly drop.
5. What Do I Do When I Don’t Need a Secured Credit Card Anymore?
When you reach a point where your credit score is good enough for you to qualify for an unsecured credit card, you can simply close your secured credit card.
However, closing it may not be a very wise choice, because it could hurt the good credit score that you’ve struggled to build. Your good payment behavior would stay on your credit report for 10 years, but you would lower the average age of your accounts.
It could also negatively affect your credit utilization ratio. It could raise your debt-to-credit ratio and hurt your credit score.
So, the best decision might be to keep the card, at least until you build more credit with several more cards. That way, you can keep improving your credit score, and you can use the card to save some money on the side. You can also have a peace of mind if you ever happen to lose one of your other cards, as you would have your secured card at hand.
6. Can My Request for a Secured Credit Card Be Rejected?
Unfortunately, yes. It is not very common for a secured credit card issuer to reject a card request, but it is possible.
If you happen to have extremely bad credit caused by a history of not paying off your debts on time and in full, an issuer may choose not to approve your request. Of course, your deposit would serve as collateral, but some issuers still decide not to take any chances.
Also, a recent or pending bankruptcy, or a history of bankruptcies, could also disqualify you from getting a secured credit card. A single bankruptcy can stay on your credit score for up to 10 years, and this isn’t something that credit card issuers would simply overlook.
Ask your current bank, or your local credit union, for an issue of a secured credit card. Applying for a card from financial institutions with which you already have an established relationship may increase your chances of approval.
Also, find a credit card provider who doesn’t check your credit score if you’ve ever declared bankruptcy.
If your request gets rejected, don’t hesitate to ask why. You have the legal right to know, and this knowledge will help you get approval next time.
7. How Are They Different Than Unsecured Credit Cards?
Here’s a chart to help you get a clear picture of how secured credit cards are different than their unsecured counterparts.
- Security deposit required
- Include annual fees usually
- High-interest rates
- Low credit limit
- You set your own credit limit
- You can increase your credit limit by putting down more deposits, and by providing full, on-time payments
- Accept low credit score
Unsecured Credit Cards
- No security deposit required
- Usually no annual fees
- Usually lower interest rates
- Higher credit limit
- Your debt-to-income ratio determines your credit limit
- Your lender may increase your credit limit once you build a good credit score
- Require average or excellent credit
8. Can a Secured Credit Card Help Me Repair My Credit Score?
Yes, it can. That’s the whole purpose of secured credit cards. If you have a bad credit score, you can start repairing it quickly with a secured card.
All you need to do is provide all your payments on time and in full, every month. If you’re ever late with the payments, you will damage your credit score.
It takes about 3-5 months of full, on-time payments to repair your credit score. If you miss a payment, the recovery time can increase up to 18 months, which could very negatively affect your credit score.
Small purchases are the best way of utilizing secure credit cards. One or two small purchases every month will show the credit bureaus that you’re using your card, so you’ll effectively build good credit.
Also, you’ll have low monthly bills to pay, so you won’t have to worry about not being able to provide full payments.
9. What Should I Look for When Choosing a Secured Card?
Choosing the right secured credit card is vital for building or rebuilding your credit score. The factors to consider when choosing one include:
- Minimum deposit – Look for a card that requires a low-security deposit if you don’t have a lot of money to pay upfront. The lowest required security deposit is around $49.
- Maximum deposit – If you want to have a higher credit limit, find a card that requires a higher security deposit. Many secured credit cards allow a limit of up to $5000, but there are several that allow an even higher limit – up to $10000.
- Fees – As with any other credit card, a secured credit card includes different fees, such as for application and processing, so make sure you compare different cards to find the most affordable one. They can also include annual fees, but that’s not always the case. Find a card with low fees, and no annual fees, because the goal is to build or repair your credit score so that you can upgrade to an unsecured credit card.
- Interest rates – You won’t have to worry about interest rates if you provide on-time, full payments every month. However, choose a card with low-interest rates, just to be on the safe side. You won’t potentially get into debt, nor hurt your credit score.
- Credit checks – Look for a provider who doesn’t conduct credit checks before issuing a secured credit card if you’ve ever declared bankruptcy. Such providers often have high-interest rates, but shop around for a thorough comparison, or simply never miss a payment once you get your card.
- Reporting to the major credit bureaus – Make sure your chosen credit card issuer reports your activity to the three credit bureaus every month, as that will help you build good credit quickly.
- Reputation – You should choose a reputable and reliable provider, so that you don’t fall for a scam, or pay higher fees and interest rates to a sketchy bank.
Payment alerts will help you keep everything in check. Most credit card issuers have an app where you can set alerts for your payments (upcoming due dates, balance, spending), but they can also send you text messages. Either way, you can also set reminders on your phone to notify you before your bills are due.
10. How Should I Use My Secured Credit Card?
To use your secured credit card wisely, and effectively build a good credit score, you should:
- Always pay on time – Paying on time every month is crucial for your credit score. If you don’t pay on time, your score will tank drastically. If you’re a day late, it may not negatively affect your score, but you’ll probably need to pay a fee.Also, your card issuer may not report your being late to the credit bureaus right away. But if you’re consistently late, even by a single day, you’ll have trouble building a good enough score to upgrade to an unsecured credit card.
- Always pay in full – Paying your monthly bills in full shows responsibility, and a good money habit, which is something that credit bureaus need to see. Moreover, it helps you avoid interest fees, and saves you money in the long run.
- Make small purchases every month – This is the so-called “candy bar method,” meaning that buying even a single candy bar each month helps you build a good credit score. You should make multiple small purchases to keep a good credit utilization ratio.
As you can see, secured credit cards are an excellent choice if you have a bad credit score or no credit history at all. It can help you build good credit from scratch, and repair your existing one fairly quickly.
There are some disadvantages of using these cards, but the pros definitely outweigh the cons, especially when you don’t qualify for an unsecured credit card. They are a great way to build good credit and take your financial situation to the point where you can use regular credit cards.
If you want to learn more about secured credit cards, and all the ways they can maximize your credit score, check out our Secured Cards detailed guide.