Should I Get a Secured Credit Card?

Jun 18, 2016 | Be First to Comment!

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A secured credit card is a great tool for anyone who wants to build or rebuild their credit history. Before you decide whether or not to apply for a secured card, you may want to consider a few important factors.

What Is a Secured Card?

A secured card is simply a credit card with a limit that equals the amount of cash you’ve put down as a deposit. It’s not a prepaid debit card, and you don’t have access to the deposit until you 1.) close the card, or 2.) upgrade to an unsecured card with the bank that issued your secured card.

Sounds interesting, right? But is it right for you?

There are only two reasons that anyone should ever get a secured card:

  1. To BUILD credit.
  2. To REBUILD credit.

For any other borrowing needs, including cash back and travel rewards, a good old-fashioned regular credit card will do the trick. But, for those of you reading this who 1.) have no credit, or 2.) have decent-or-worse credit, then a secured card is probably the best choice for you.

You may be thinking, “But I want cash back and travel rewards.”

Well, hang on. You might qualify for an unsecured card. How do you know?

Ask yourself, “Do you have credit?” If your answer is “Yes,” then ask, “Is it all in good standing?” Do I pay my bills on time? Do I pay my bills? If you answered, “Yes,” to those questions, go find yourself a cash back or travel rewards unsecured credit card.

If you can’t answer a resounding, “YES,” to any (or all) of those questions, then let’s look at secured cards.

Using A Secured Card To Build Credit

Maybe you didn’t graduate from high school and move directly onto a campus where credit card companies were throwing offers at you as quickly as you could catch their free frisbees. If you weren’t in a position to start building credit with a student card, then you’re most likely looking for ways to build your credit now. One great way to build a credit history is to open a secured card.

To open a secured card, you’ll need cash for a deposit. Then, you’ll need to apply. Before you apply, do your homework. There are more secured cards in the world than what your local bank offers. Good factors to look for include:

  • the amount required for the deposit
  • the length of time before a review
  • the ability to upgrade to an unsecured card
  • any annual fees

Take a look at the interest rate, as well, but keep in mind, it’s best to always pay off the balance in full every month. You’ll avoid accumulating interest, and you’ll impress the guardians of your credit history.

Let’s break down these factors.

Most secured cards require a deposit in the range of $250 to $1,000. If you’re just starting to build credit, you’ll most likely be approved for a card at the lower end of that scale. Be sure to have the cash available when you apply, because once you’re approved, you’ll need to transfer that money to the card issuer. That money will be tied up the entire time you’re building your credit, so don’t use money that you’ll need access to within at least a year.

The average length of time before the card issuer reviews your payment history is one year. A lot of issuers can shorten or lengthen that time at their discretion. If you’re paying off your balance in full and on time every month, then a year will likely be all you need to build your credit and prove your credit-worthiness.

When you apply, make certain that after a review, the bank can issue you an unsecured card. One very real factor in building a credit history is length of time you’ve had an open account with an institution. If you close the secured card and apply for unsecured cards elsewhere, you’re losing a year of history with the card issuer. That can cause a dip in the credit score you’ve spent a year raising.

Depending on the issuer, there may be an annual fee to use the card. Very rarely do these exceed $50. Often, the annual fee is $35 to $40, and applied to the credit card balance the month it comes due. Make sure to plan for it, and pay it off in full, as well. If the fee is more than $50 a year, and there are no benefits that come with that fee (such as cash rewards or travel points) then take a second look at other cards and save yourself a little money.

Okay, I’ve Got My Card. Now What?

Once you’ve paid a deposit, you’ve got to be careful about how much of the credit limit you use, as well as how quickly you pay it off.

If you put down $300 as a deposit, then you have a $300 credit limit. Use only 10% to 30% of that amount at any time.

The best way to keep the balance low is to use the card for one thing only. Buy a tank of gas every month with the card and then pay off the full balance when the bill arrives. After a year, you’ll have twelve months of reported, on-time payments with the credit bureau. That does wonders for your credit score, and for the review with the card issuer.

Once they see that you’re credit-worthy, you’ll be on your way to an unsecured card, and higher credit limit - which you’ll still use as responsibly as you used the secured card while building your credit.

Using A Secured Card to Rebuild Credit

Let’s say that you once had a few unsecured cards, but the balances kept growing, and your ability to pay them off started dwindling. You fell behind on payments, paid late a few times, or missed a few payments altogether. Creditors started calling. Maybe medical debt started piling up. Bankruptcy followed. Your credit-worthiness took a blow. You gave yourself a year or so to recover, put some money aside for emergencies, and decided to prove yourself credit-worthy again.

A secured card is a great place to start rebuilding that credit.

Let’s break down these factors.

All the same factors apply in looking for the right secured credit card. You’ll need to look for:

  • the amount required for the deposit
  • the length of time before the review
  • the ability to upgrade to an unsecured card
  • any annual fees

But, there’s one more factor that someone with a less-than-stellar credit history needs to look for:

If you’ve declared bankruptcy, some card issuers won’t approve your application for up to two years after your discharge date. Be sure to know that length of time for certain before applying so they don’t do a hard pull on your credit and make your credit score dip even further.

If you haven’t declared bankruptcy, but have lots of outstanding, unpaid debt to other card issuers, hospitals, banks, payday loan providers, or even the IRS, you’ll want to call each of those creditors and negotiate terms of repayment. In some cases, a creditor will accept a portion of the balance and close the account.

Before applying for a secured card, make sure that you’ve made agreements with your former creditors, and that those agreements are reflected on your credit report. A secured card can’t help you rebuild credit unless there’s some payment on or forgiveness of old debt. Whatever factors lowered your credit score, those need attention before you start to rebuild. Contact a reputable credit repair service or a bankruptcy attorney to help you manage that old debt.

Then wait at least a year after the old debt is either in remission or been discharged in bankruptcy. Save a deposit. Check with your top choice secured card issuer to see how long they require after said remissions or discharges. You may have to wait one more year before applying.

It may be harder to be approved for a secured card with an issuer that you have not paid in the past. For instance, if you discharged a balance from a Discover Card in bankruptcy, it can be harder to be accepted for approval for a secured card through Discover. Take a look at banks and issuers that you have not worked with in the past if you've been in default before.

On the flip side, if you have a bank or issuer that you've had a long history and no default with, then that could help you get approved with them. Some banks are more willing to give new credit to their proven customers, so you can use this to your advantage if you have this kind of positive history with a bank or issuer.

I’ve Been Issued a Secured Card to Rebuild Credit. Now What?

Use it responsibly. Keep the balance at 10% to 30% of the limit. Pay it off in full every month.

Do not think of it as an emergency fund. A secured credit card is only a tool to help you repair your credit score. You are not rebuilding your ability to max out cards to the limit.

Secured Credit Cards Can Be a Great Financial Tool

Whether you’re building credit for the first time or rebuilding your existing credit, a secured card can be an excellent tool in your financial belt. Just remember that it takes time to build well-crafted, solid foundations. Use a secured card wisely, and you’ll be proud of the credit score and history that you’ve, ahem, secured.

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