There is no doubt that credit cards are a crucial aspect of building a strong credit score and credit history. In many ways, they are a necessary evil, but for some people they are quite hard to come by. For people who have never had a credit card or need to repair existing poor credit history, it might be impossible to qualify after applying for new credit cards.
That is why getting a secured credit card may be the best option for certain people. With a secured credit card, people with no credit or bad credit can work to establish – or re-establish- their credit scores.
If you are asking yourself, “Should I get a secured credit card,” there are some clear questions to ask.
What Is a secured credit card?
This is the first question we have to answer. A secured credit card is just like any other credit card except for one key aspect. Where the credit line for usual credit cards comes from the providing company, secured cards’ credit line requires a cash collateral. What that means is that you can only put a finite amount of money onto that secured card. If you put $500 into the account, you can only spend $500.
Some secured credit cards give the user the opportunity to add to the deposit to extend your credit. Sometimes banks will reward good payment history with the ability to add to your credit line without the need request additional deposits. Most often, however, the line is an established amount from month-to-month.
How Much Money Do I Have to Deposit?
The amount will vary by card, but typically the allowed minimum deposit will be either $300 or $500. Your credit limit will either be the full amount of your deposit, or a percentage of the total amount.
What is the best place to get a secured credit card?
Most credit unions offer secured cards to their members and sometimes even offer lower interest rates and waive annual fees.
A number of well-established credit card companies offer secured cards as well. Companies such as Master Card, Visa, Discover, Citi, and more offer their own forms of secured credit cards for potential customers to use.
Do All Banks Offer Secured Cards?
Nope! In fact, there is a current trend in banking that shows financial institutions moving away from secured credit cards, and instead offering unsecured cards with lower limits and higher interest rates and fees.
Despite that trend, it is still helpful to apply and utilize a secured card if you have access to one. Secured credit cards can help people rebuild their credit, but they are maybe best for those who are new to credit and are looking to build good credit history rather than fix past mistakes.
What Kind of Charges Can I Expect?
This is one of the best credit card questions to ask no matter what card you are considering taking out, and a secured card is no different. The answer is it that it will take quite a bit of research to really know the answer. Still, it definitely pays (no pun intended) to weigh the pros and cons of several different cards.
“Shopping around and looking at more than just the headline rate of the credit card.. factors such as monthly fees as well as what the interest rate goes up to in default can be more impactful for customers.. particularly when in financial difficulty” according to marketer Jeremy Hughes in Perth, Australia
Avoid cards that request that you pay an application fee. Most cards do charge an annual fee that can be taken out of your deposit, but make sure to read the fine print and avoid cards that seem to have an endless number of potential fees. Some users will get a secured loan only to find that all the money the deposited has been used to pay for hidden fees and charges. You want to make sure you’re not adding your name to that list.
It may take some time for you to figure out where the best place to get a secured credit card for yourself is, but it is worth the added effort.
Are There Any Other Things to Keep an Eye Out For?
To answer it simply, yes! Some secured credit cards have low fees and can leave customers happy with healthy credit. Others take advantage of their users and their less-than-ideal financial situations.
While many credit card issuers have been subject to enforcement by the Consumer Financial Protection Bureau, secured credit cards have yet to be targeted in a similar way. Because of that, it is crucial that you do your homework yourself.
Before you sign up for a secured credit card, make sure to gather as much information as possible. Pay special attention to interest rates, fees, and the required deposit. Make sure you know the questions you want to ask before getting your secured credit card and make sure you get the answer to those questions.
Can I Be Denied a Secured Credit Card?
Again, to answer it simply, yes. While it’s easier to get approved for a secured credit card than an unsecured card even with bad credit, you can still be denied. You can be denied for certain secured credit cards if you declared bankruptcy within the last year. The same applies delinquencies or red flags on your other accounts, or if you have a negative history with a financial institution.
In the event that you are denied, the issued must sent a letter in the mail explaining why. The letter will also direct you how to access a free copy of the credit report that was used to inform their decision to deny your application.
How Long Does It Take to Qualify for an Unsecured Card?
After good behavior, you will likely be able to apply and qualify for an unsecured credit card with a line of credit quite larger than your deposit. If you’ve been using your secured credit card in a positive and responsible way, the card issuer (which remember can be companies like Visa, MasterCard, and more), will want to keep you as a customer. If you’ve made your payments on time for approximately a year, you should be good to go to qualify for an unsecured card. Congrats!
Does the Issuer Report to Major Credit Bureaus?
While being able to use your secured credit card like an unsecured credit card is definitely a key asset to getting one, the main reason to get one is to improve your credit score and build good credit history.
If your issuer isn’t reporting your activity, you are missing out on one of the key benefits, so make sure that they do. Also, before you apply, ask if the issuer will flag the report to the credit bureaus as a secured card. This might work against you and be a deterrent to letting you rebuild your credit.
One good tip is that if you start receiving mail offers for unsecured credit cards after making several months of payments on time to your secured card, you’ll know that the secured credit card issuer is reporting to the credit bureaus.
How Can I Make the Best of My Secure Card to Build Credit?
This is crucial to pay attention to. After all, this is quite likely the reason you wanted a secured credit card in the first place. The best way to use your secured card is to use it to buy a few things and make sure you pay it off in full every month. You should not be using this card as a primary payment method. They can help you improve your credit score substantially, but only if you use it the right way.
If you fail to pay it off, be prepared to face higher than usual interest rates. On top of that, secured credit cards usually have high annual fees. Get one if you need one, but also work to improve your credit and move on to an unsecured credit card as soon as possible.