Secured credit cards are geared toward people with poor credit, limited credit history or no credit at all. They are much easier to get approved for compared to unsecured credit cards.
Here’s everything you need to know about how secured credit cards work and how they can help you improve your credit.
What is a secured card and how does it work?
A secured credit card requires an upfront deposit, which is usually equal to the credit limit on your card. So if you deposit $300, you’ll typically end up with a $300 credit limit available to spend.
If you consistently pay your bill on time, the credit card company may increase your credit limit without requiring you to deposit more money. Additionally, it may also refund your deposit after you’ve demonstrated responsible credit card usage. Your deposit will also be refunded once you close your account or upgrade your card in good standing, assuming you do not hold a balance.
Also note that most secured cards report to the three major credit reporting bureaus, Experian, Equifax and TransUnion. If you want to improve your credit score, make sure you apply for a secured card that will report your credit activity.
Why are secured cards easier to get?
Secured credit cards are easier to get because your upfront deposit is used as collateral by the bank issuing the card. This means if you put down a security deposit of $300 to get a credit limit of $300 with a secured card, you’re effectively securing your own credit limit and thereby limiting the card issuer’s risk.
If a consumer makes charges on their secured credit card and doesn’t pay the money back, the credit card company can keep their deposit to cover those charges along with interest that accrues and late fees. Ultimately, this is why secured credit cards are easier to get approved for than unsecured credit cards that don’t have a collateral requirement.
How to build credit with a secured credit card
If you want to build credit with a secured credit card, consider the following tips:
- Pay your bill on time each month. Since your payment history is the most important factor used to determine credit scores, paying your credit card bill early or on time each month is the most important step you can take.
- Keep your credit utilization low. How much you owe against how much you can borrow may also impact your score. Most experts recommend keeping your credit utilization below 30% of your total available credit for the best results.
- Track your progress over time. Keep tabs on your credit score and monitor your progress over time. There are many free tools to use, including Capital One’s CreditWise tool and Experian’s MyExperian program. By staying the course with responsible usage, you’ll have the best chance at improving your credit score enough to upgrade from a secured credit card to an unsecured credit card.
Secured vs. unsecured credit cards
An unsecured credit card is a credit card that doesn’t require you to deposit money upfront because the credit card issuer considers you a reliable enough borrower to pay back your debts. When people think of a traditional credit card, they have an unsecured card in mind.
A traditional credit card typically comes with a higher credit limit as well, although this can vary based on the consumer’s income, credit score and type of card they apply for. Many traditional credit cards also come with rewards and other incentives, but they have much higher requirements to get approved.
In some cases, you can upgrade your secured card to a traditional credit card after demonstrating a pattern of responsible credit habits.
Pros and cons of a secured credit card
Pros
It is generally easy to qualify for.
The required deposit may be small, such as $200.
Some secured credit cards transition good customers to an unsecured card when they show they can handle credit responsibly.
It can help you steadily improve your credit score.
Cons
You’ll need to leave your money on deposit; you can’t touch it.
A secured card may charge high fees.
The issuer may perform a hard credit check when you apply, which can ding your credit score.
A low credit limit makes it easy to raise your credit utilization rate, which could in turn lower your credit score.
Who is a secured card best for?
Applicants with a limited credit history
If you haven’t used credit often before, there may not be enough information in your credit file to prove that you can be trusted. When you get a secured credit card, the credit card company will report every month to the credit bureaus whether you are paying off the card as agreed. By consistently paying your credit card bill on time and not spending more than your credit limit, you could build up a solid track record.
Anyone with a lower credit score
If you have a FICO score of 580 or below, a secured card can help you improve your credit score. The same activities that help you establish good credit can also help bring up your credit score. Getting a secured credit card, paying the bill in full each month and staying within your credit limit can help raise your low credit score.
FAQs
With a secured credit card, you’re using credit, even though it’s funded by your deposit. Your credit card usage and payment activity will be reported to the credit bureaus, which can help boost your score over time.
Prepaid debit cards look like credit cards, even down to the Visa or Mastercard logo, but they aren’t credit cards. With a prepaid debit card, you’re not using credit when you buy something. Instead, you load up the card with your money before using it. Since there’s no credit involved, the debit card company doesn’t report to the credit bureau, and you don’t build up your credit file.
Prepaid cards may help you stick to a budget, but they won’t actively help you improve your credit.
After opening a secured credit card account, it will take around one to two months for the secured credit card issuer to report it to a major credit bureau, at which point it will begin impacting your credit report and your credit score. Then it takes several additional months before the account’s activity is substantial enough to make a difference.
If you maintain a low or $0 balance and manage the rest of your finances well, you could raise your score several hundred points in a year or two, but it’ll depend on your particular situation. If you have a longer credit history with a number of issues, it will take longer. If you have a shorter history, each month’s activity will play a much larger role.
Some credit card providers have an option to transition to a traditional, unsecured credit card after you’ve shown you’re responsible with credit. If you want a card with a seamless transition pathway, look for that feature while shopping for a secured credit card.
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