What Are Secured Credit Cards and Why Are They Important for Customers?
Secured credit cards are types of credit cards that are designed to help their users build or improve their credit score. It can be tough to get a regular credit card if you have a history of late payments, bankruptcies, or no credit history whatsoever.
Banks need a guarantee that their customers will pay back their debts in full and on time, so they’re very careful, and often rigorous when issuing credit cards. They rarely provide credit cards to high-risk customers, simply because they don’t want to risk losing money.
This is exactly where secured credit card come in. Whether you have bad credit, or you’re looking to establish good credit from scratch, a secured credit card might be the best way to go.
Secured cards accept a low credit score, which is yet another reason why many consumers are using them. Also, they have a low credit limit, which helps consumers avoid debt and further damage their credit scores.
However, to get a secured credit card, you need to make a security deposit. Your chosen bank will use the deposit as collateral so that it has a guarantee to fall back on if you fail to provide your payments.
The deposit is refundable, but you must give it upfront to open an account.
Who Gets Secured Credit Cards and Why?
Secured credit cards are for individuals with a poor credit score, including those who have declared bankruptcy at some point. This is because these cards can help them improve their credit score, and quickly qualify for an unsecured credit card.
People with a poor credit score may be able to get some regular credit cards, but they usually carry high fees and high-interest rates. In cases of extremely bad credit, they simply aren’t eligible for unsecured credit cards.
People with no credit history at all can also get secured credit cards because these cards are great for building credit from scratch.
Students can also easily get secured credit cards since they usually don’t have a credit history. But even when they do, having another account improves their creditworthiness.
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How Can Using a Secured Credit Card Improve My Credit Score?
With a secured credit card, you get a second chance to show responsibility and prove that you can have a good payment habit. However, you must provide all your monthly payments on time, and in full.
Your credit card issuer will regularly report your payment history to the major credit bureaus, which will directly influence your credit score. Not every provider sends reports to the bureaus regularly or only reports to one or two of them. Finding a provider who will report to all three of them every month is essential.
Credit bureaus also want to see that you have more than one account because it shows that you are creditworthy.
Actively using your secured credit card every month, even for the smallest of purchases, can greatly improve your credit score. Small purchases, which you pay off on time and in full, actually show that you’re a responsible borrower, and they can also lower your credit utilization ratio, which is a huge factor for building a good credit score.
If you always carry a balance of less than 30% of your credit limit, your credit utilization ratio will drop. If you go above the limit, your credit score will drop.
5 Major Differences Between Secured Credit Cards and Regular Cards
Secured and regular credit cards are similar in functionality but have some notable differences.
One: Secured Credit Cards Require a Security Deposit
The biggest difference between these two types of credit cards is that you must provide a security deposit (which is refundable) upfront so that you can open an account for a secured credit card. Regular cards require no such deposits, as banks issue them upon checking your credit score, employment, and income.
Two: Regular Cards Require a Good Credit Score
You need to have an average or excellent credit score to obtain a regular credit card. There are banks that can provide you with a regular credit card if your credit score is not very good, but they come with very high fees and interest rates.
On the other hand, you can easily get a secured credit card if you have a poor credit score. Your provider may not look at your credit score (although some do), but rather only check your income, and your previous payment habits.
They’re not likely to approve your application if you have a very bad history of missing payments, or if you’ve recently declared bankruptcy (or have a history of bankruptcies).
Three: You Can Improve Your Credit Score with a Secured Credit Card
As opposed to regular credit cards, you can repair your bad credit score with a secured card. After all, the primary purpose of these cards is to help people improve their credit scores.
You can improve your score by always providing full, on-time payments, and by keeping a low credit utilization ratio.
Four: You Can Build a Credit Score from Scratch with Secured Credit Cards
Another purpose of secured credit cards is to help you establish a credit score when you’re a first-time credit card user. So, you can get a secured credit card even if you have no credit history at all. It can be a great stepping stone toward unsecured credit cards.
Given that you must provide a security deposit in advance, your card issuer will have collateral to fall back on if you don’t pay off your debt in full.
You can get a regular card without a credit history, but you need to provide your chosen bank with your employment and income information. The bank will then determine whether you’re a low-risk or high-risk borrower so that it can decide whether or not to approve your request.
Five: Low Vs. High Credit Limit
Secured credit cards have a low credit limit, which is actually set by your deposit. Every provider allows different minimum and maximum deposits that set your credit limit.
However, you can increase your credit limit by putting down additional deposits. Your provider may also increase it if you’re always punctual and clear all your monthly payments.
Regular credit cards have a robust credit limit, but you can’t set it yourself. Your bank uses your debt-to-income ratio to determine your credit limit, that is, estimate how much of your monthly income you can use to provide monthly debt payments.
Also, your bank is the one who can increase your credit limit, if they determine over time that you can handle it effectively.
3 Steps You Need to Go Through in Order to Get this Credit Card
The application process for getting a secured credit card is very quick and easy. Here are the steps.
One: Make Sure You Meet All the Necessary Requirements
Once you’ve found the right secured credit card provider for your needs, check all their requirements, and your credit score (if you have one), so that you can be sure that you’ll get the approval. Fix any inaccuracies that may exist in your credit reports, and make sure you pay off any debts you may have.
Two: Fill Out and Submit Your Application
You can apply for a secured credit card either online or in person. Whatever the case, you’ll need to provide your personal and financial information, including:
- Date of birth
- Social security number
- Phone number and email address
- Employment information
- Annual income
- Banking details
- Your desired security deposit amount
You’ll need to wait a couple of days for the bank to review your application, and check your credit report. If you have no unpaid debts, no recently declared bankruptcy, and no history of consistently missing payments, you’ll get your approval.
Three: Make a Deposit upon Approval
Once your application is approved, your bank will ask you to make your deposit, so that it can open your account. As soon as everything is in check, your bank will mail you your secured credit card, which will arrive at your address within 2-3 weeks.
Some banks require the necessary funds to be in your savings account before approval, while others allow a certain deadline from the time of the approval, in which case you can probably provide the deposit in installments.
Why Is the Deposit Mandatory When Getting Secured Card?
Banks that provide secured credit cards usually don’t check your credit score. You could have a very bad credit score and still get a secured card.
However, those banks need to have a guarantee that their customers will pay off all their debts. They simply can’t go about handing credit cards to everyone without considering potential risks.
This is why a security deposit is mandatory. You need to provide your secured credit card issuer with collateral, that is, security for repayment. Because if you don’t repay your debt, the bank gets to keep the deposit and continue operating smoothly. If you do, and you do it on time and in full, you can get your deposit back.
How Big of a Deposit Do I Have to Make?
You decide how big of a deposit you will make, but different providers have different requirements regarding their minimum and maximum deposits.
The lowest deposit you can make is about $49, while you can choose to go as high up as $10000. Most of the banks allow their customers to make a security deposit of up to $5000 to obtain a secured credit card.
Can I Get a Refund on My Deposit?
Yes, you can. If you always provide full payments on time, you can get your entire security deposit back, once you upgrade to an unsecured credit card. It will show that you’re a responsible borrower, so there will be absolutely no reason to deny you your rightful refund.
5 Common Mistakes First-Time Secured Credit Card Owners Make
If you get a secured credit card, make sure you avoid the following pitfalls that could hurt your credit score.
1. Missing Payments
If you ever miss a payment, your credit card provider will hit you with a late fee. However, late payments can also hurt your credit score, and accrue interest rates.
A single late payment (30 days) will hurt your credit score by 90-110 negative points, and it will stay on your credit report for 7 years.
What’s more, if you don’t provide your monthly payments on time, you won’t be able to get a full deposit refund once you qualify for an unsecured credit card and pay off your balance in full.
2. Making Minimum Monthly Payments
Many first-time owners of secured credit cards take the credit utilization ratio too seriously in that they make only the minimum monthly payments.
However, while it’s important to keep the ratio low, it’s also vital to carry a balance of up to 30% of your credit limit. That way, you can build a good credit score.
You should make multiple small purchases every month to keep the ratio low and show the credit bureaus that you’re really using the credit, and that you’re using it responsibly.
3. Maxing Out Their Secured Card
Another mistake is maxing out the card, which can also hurt your credit score. People think that the more purchases they make, the faster they’ll build or improve their score.
However, going over 30% of their credit limit makes their credit score drop significantly.
4. Not Keeping Track of Their Purchases
Keeping track of your purchases is paramount for keeping a good balance on your secured credit card. This can be a bit challenging when you switch from cash to a credit card, simply because you don’t actually have the physical money in your wallet.
But if you don’t keep tabs on your purchases, you could increase your credit utilization ratio, and hurt your credit score. Avoiding this mistake will also help you develop good spending habits.
5. Getting Too Many Secured Credit Cards
This is one of the most common mistakes with first-time secured credit card owners. It can be tempting to get several cards, but that could greatly lower your credit score.
Even if you’re a responsible borrower, and always pay everything in full and on time, your lenders may start thinking that you carry a risk to them. They wouldn’t want you to max out all your credit and fail to provide the necessary payments, so they could decide to cut you off completely.
6 Important Things to Look Out for When Comparing These Cards
Conducting thorough research when choosing a secured credit card is absolutely crucial for making the right decision. Here are the most important factors to watch for when comparing different providers.
1. Annual Fees
The goal of getting a secured credit card is to build or improve your credit score, so you might want to find one that will save you money on fees. The most important fees to look out for are annual fees, and foreign transaction fees if you plan on using the card abroad.
Many secured credit cards charge low annual and foreign transaction fees. There are even some even waive annual fees for the first year, but there are also those with no annual fees whatsoever.
2. Interest Rates, or APR
Interest rates, or APR (annual percentage rates), vary depending on a secured credit card issuer. You should look for a card with low interest rates so that you avoid paying too much if you ever fail to provide payment by its due date.
However, make sure you’re never late with payments, so that you don’t have to worry about accruing interest rates, not to mention negatively affecting your credit score.
3. Credit Limit
The credit limit is yet another very important factor to watch for since it determines how much money you can spend on your credit card. You should look for a card that allows enough credit limit for your needs, but be careful not to choose too great of a limit, so that you don’t risk falling into debt.
The deposit you put down is what sets your credit limit. Every provider has different requirements for minimum and maximum deposits, so be sure to check them out before making your final decision.
4. Reporting to the Major Credit Bureaus
Not reporting your payment activity to the three major credit bureaus won’t help you build or improve your credit score. Make sure the provider you choose sends monthly reports regarding your payment activity to all the credit reporting agencies so that they put your good behavior in your credit report.
5. Credit Checks
While banks providing regular credit cards always conduct credit checks prior to issuing the cards, this is not always the case with secured credit cards. If you have nothing to worry about regarding past credit behavior, credit checks may not be very important to you.
But if you’ve just declared bankruptcy, or have a history of bankruptcies, or you perhaps used to consistently miss payments on previous credit cards, you might want to find a provider that won’t check your credit.
Rewards are great incentives for secured credit cards. You can get a card that gives you points that you can use for travel, getting a cashback, or making retail purchases. The more you spend, the more points you earn, which means saving a lot of money in the long run (but only if you borrow it responsibly).
However, these cards usually come with annual fees, but the rewards can often reduce them. If you’re interested in reward programs, find a card that offers rewards for things on which you regularly spend the most.
5 Common Secured Credit Card Myths
A lot of people don’t even consider getting a secured credit card, because there are some quite ridiculous misconceptions about them. Here we debunk all the myths.
Everybody Can Get a Secured Credit Card
Not everyone can get approval for a secured credit card. These cards are made specifically for people with bad credit, or no credit history at all, such as students and first-time borrowers.
But despite those requirements, there isn’t a guarantee that you will get approval. If you’ve made many missteps along the way, such as severely missing your payments, or going bankrupt several times, you’re not likely to get this card. Having a pending bankruptcy would also ruin your chances for approval.
Secured Credit Cards Are Costly
Secured credit cards are very affordable. Their annual fees, if any, are very reasonable. They don’t go above $50.
They do usually come with higher interest rates than regular credit cards, but you won’t accrue them if you’re always punctual with your payments and clear them every month.
What’s more, you decide how much you want to spend, because you set your own credit limit with the initial deposit you put down.
Regular Credit Card Providers Treat Secured Credit Cards Differently
This really couldn’t be further from the truth. There’s absolutely no reason why providers of regular credit cards would treat their secured counterparts any differently.
The cards are the same in functionality, except they’re made for people with lower credit score, to help them improve it, and for people who need to establish that score from scratch.
Secured credit cards are stepping stones toward unsecured cards, and no bank would ever treat you any differently when you want to upgrade to a regular card. As a matter of fact, if you manage your credit responsibly, and build a good credit score, every bank will deem you creditworthy.
What’s more, nowhere in your credit report will it say that you have a secured credit card. What every lender will see on your credit report is the payment history of just another credit card.
Secured Credit Cards Are a Great Way to Borrow Money
When you have a secured credit card, you don’t actually borrow money from your bank. You practically borrow it from yourself. This is because your credit limit is determined by a cash deposit that you must put down to open your account.
But why then would you want to put money in an account in the first place? Because your secured credit card will help you build a great credit score. Whether you have a bad score, or you’re a first-time credit card user, you’ll build good credit necessary for getting a regular credit card.
People Only Get Secured Credit Cards When They Have No Other Choice
This is also a very common myth floating around about these cards. There are actually several great alternatives to secured credit cards, so they’re far from being the last resort.
If you don’t qualify for an unsecured credit card, you can get a debit or prepaid credit card. However, those don’t help you with your credit score, because they don’t report to the major credit bureaus.
If you want to build or rebuild your credit score, but you don’t get your approval for a secured card, you have other things to choose from, such as credit builder loans, merchandise accounts, and student credit cards.
Are There Any Rewards for Using One of These Cards?
Rewards, or bonuses for spending, are common with regular credit cards, but quite sparse when it comes to secured credit cards. They also differ when it comes to different issuers.
If you’re looking for a secured credit card with rewards, you should know that those usually come with annual fees. However, they can help you earn extra money on your spending.
For instance, you can get a card with points or miles that you can use to book flights, hotels, restaurant reservations, and more. You can also get cashback on your purchases, or get points for making retail purchases, such as at gas stations or grocery stores.
You won’t be charged extra for the rewards, but be sure to look for those that will actually benefit you. Also, check for any potential limits to earned points or miles, and whether there’s an expiration.
Can I Graduate from a Secured to a Regular Credit Card?
Absolutely. Secured credit cards are stepping stones toward regular cards, so you can upgrade your account easily, once you meet all the necessary requirements and pay off your balance in full.
Secured Credit Cards FAQs
The lowest deposit you can make is $49, while the highest is $10000. Most of the issuers allow you to make a deposit of up to $5000.
You can get a secured credit card if you have a bad credit score (to improve it), or no credit history at all (to establish good credit from scratch).
Secured credit cards are cards designed for building or rebuilding credit. They differ from regular cards in that you must make a deposit (refundable) to open your account, and there’s usually no credit check.
Your security deposit is refundable, but you’ll get it back in full only if you always provide full on-time payments. You can get your refund once you choose to graduate to an unsecured credit card and close your secured card, provided that you’ve paid off your balance in full.
It depends on your secured credit card issuer. Each has different minimum requirements for the deposit, but the lowest amount is $49. Since the deposit determines your credit limit, choose the amount that will allow you enough flexibility, but be sure you can afford it.
By making all your payments on time and in full, you show that you’re a responsible, creditworthy borrower. Your good payment history is reported regularly to the major credit bureaus, which put your good behavior in your credit report, thus raising your credit score.
It depends on how big of a deposit you want to make. Different issuers have different minimum and maximum deposit requirements. It also depends on the annual fees (ranging from $29-49), but there are plenty of cards with no annual fees.
You get a low credit limit (set by your security deposit), and you accrue higher interest rates if you don’t make full, on-time payments every month. You can increase your credit limit by making additional deposits, or your issuer may choose to increase it after a particular period of your good payment behavior.