Have you ever heard of a secured credit card before? Secured credit cards are an incredibly useful tool for anyone looking to improve their credit or establish it for the first time. Unfortunately, they also tend to be a lesser known tool.
It's time we changed that.
Secured cards are perfect for building and improving credit. You don't need to pass a credit check to get one. For some, you don't even need a bank account to get one. And just a small amount of time using one (think one year or less) can make you eligible to move up to a regular credit card.
Intrigued? Here's how they work.
You can get a secured card online through a credit card issuer or even through a regular bank. All you have to do is put up a security deposit as collateral for the card. In most cases, this deposit dictates the amount of your credit limit. How much do you have to put down? You can go as low as $200 (and even less in some cases).
Once you have a secured card, your usage of the card is reported to the major credit bureaus. If you keep your balance low and pay on time every month, this reporting will lead to a higher credit score for you. Pretty easy, right?
If you fear your score is too low for even a secured card, fear not. These cards are perfect for credit scores ranging from 300-560. So the only real question you should be worried about is: Which secured card should I get?
That's where we come in! We've gone through some of the best secured credit cards out there to find the best ones for you. Check 'em out below.
1. The Best Card With the Lowest Security Deposit Requirement
Capital One® Secured MasterCard® Helps You Quickly Rebuild Credit
The Capital One® Secured MasterCard® only requires a very low security deposit. That means you can get you started with rebuilding your credit right away. With a security deposit of just $49, you’ll qualify for a $200 starting credit limit. You can increase this limit with additional deposits at any time up to $3,000. This card has no annual fee. Since there's no annual fee you can use this card for no cost to you. (Assuming, that is, that you pay your balance off each month.) When you close the card, you get your security deposit back.
How to Recover from Bad Credit Scores
How does someone end up with a bad credit score? Often simple things like late payments and missed payments, compounded over time, can cause your score to dip dangerously low. When things like this happen, your lender reports them to the three major U.S. credit bureaus.
Other actions that can hurt your score include unpaid bills, accounts in collections, bankruptcies, and foreclosures. If this happens too often, your score will become so low that you won't be able to qualify for traditional credit cards and loans. And, even if you do qualify, it will likely be at a much higher cost:
How Your Credit Score Can Affect Your Future Mortgage Rate
|Credit Score Range||30-Year Fixed Rate Mortgage||5-year fixed rate mortgage||7/1 ARM|
How Your Credit Score Can Affect Your Next Car Loan
|Credit Score Range||60-Month new Car Loan||40-Month Used Car Loan|
How Your Credit Score Can Affect Your Next General Loan
|Credit Score Range||HELOC||Home Equity Loan|
This is why it's so important to work on improving a bad credit score. And things like secured credit cards can help. Improving your credit score doesn't just qualify you for more credit in the future - but it can save you money on the credit you get. That's long-term savings worth working for.
The Purpose of Security Deposits in Secured Credit Cards
Because secured credit cards are tied to collateral, lenders are more willing to lend to borrowers with imperfect credit. Usually, your security deposit sets the amount you'll have as a credit limit. You can usually increase your limit by increasing your deposit (which can be done at any time).
When your card issuer gets your security deposit, they'll place it in a deposit account. This is money that you don't have access to until or if you close your card. (If your balance is zero when you close your card, you'll get a refund on your deposit.) You may also receive your deposit back if your issuer upgrades you to an unsecured credit card.
2. The Best Card With the Highest Credit Limit
Wells Fargo Secured Visa Offers A Large Credit Line for Bad Credit
The Wells Fargo Secured Visa Card offers the potential of a very high credit limit, especially for a secured credit card. The card’s limit can range from $300 to $10,000, depending on your security deposit. Even better, Wells Fargo regularly reviews your account to see if you're eligible for an upgrade to an unsecured credit card.
The fact that Wells Fargo proactively tries to help you move on to a traditional credit card is a great feature. In the best case scenario, you'll only use a secured card long enough to improve your credit score enough for an unsecured card. Wells Fargo helps make that transition more seamless for you. The card does come with a $25 annual fee but has a lower than average APR for its kind.
This card is special because most secured cards don't allow you to maintain a credit limit of more than $3,000-$5,000. A higher credit limit is beneficial for a variety of reasons. One, you can make more or larger purchases. Two, it will help you achieve a lower credit utilization rate, which will improve your credit score. (Read on below to learn more about credit utilization.)
How Your FICO Credit Score Matters
FICO credit scores are the standard metric used by lenders to judge your creditworthiness. In other words, FICO gives lenders an idea of whether or not you're likely to default on a loan or line of credit. Although FICO doesn't disclose the exact formula used to calculate its credit scores, it does share the criteria that factor in.
"Amounts owed” looks at your total balances divided by your total credit limit. For example, a $1,000 balance on a credit card with a $10,000 limit means your debt utilization is at 10%. If you use a lower percentage of your available credit, your credit score will be higher. Keeping lower balances with higher credit limits will help decrease your credit utilization.
If you have a traditional credit card you can decrease your credit utilization by asking for a credit line increase. Secured card borrowers don't have to do this. Instead, they can simply put down more on their security deposit and their credit limit will go up. This is an easy way to improve this portion of your credit score (if you have the extra money to deposit).
Secured Credit Cards Can Become Unsecured Cards
Some secured card issuers will review accounts periodically to see if they may be eligible for an upgrade to a secured card.
If you want your account to be ready for this review, simply make all your payments on time and keep your monthly balance as low as possible. Your card issuer may then allow you to graduate to a traditional credit card.
The other alternative would be to close your secured credit card and open an unsecured credit card when your credit has improved. However, you may not want to take this route. Opening a new credit card and closing a credit card are actions that can hurt your credit scores - at least temporarily. Applying for new credit can have a slight impact on your credit score if the application behavior makes it seem like you need new credit a little too much. Meanwhile, a closed credit card account will stop aging. That affects the “length of credit history” criteria of the FICO credit score calculation.
3. The Best Card That Offers Cash Back
Discover it® Secured Offers Cash Back Even with Poor Credit
The Discover it® Secured Credit Card is one of the few secured credit cards that offers rewards. With this card, you can earn 2% cash back at gas stations and restaurants (up to $1,000 in combined purchases per quarter). All other purchases earn 1% cash back. That's not all you'll get, though.
This card also gives you access to your FICO score, updated monthly for free. You also won't be charged a fee for your first late payment, there's no late payment penalty APR, and there are no foreign transaction fees. Finally, you won't even be charged an annual fee for this card.
To qualify, you would need to put down a security deposit of $200-$2,500.
Secured credit cards are typically designed with the main focus of credit improvement. Therefore, not many of these cards will provide extra features like cash back. That's what makes this card really special. It gives you an opportunity to build credit and earn rewards at the same time.
Earn Cash Back While Building Good Credit
Cash back is a type of reward that allows you to accumulate money back for using your card. Usually, you can redeem your cash back through check, direct deposit, or a statement credit. Keep in mind that these cards do sometimes impose limits on cash back earnings.
With credit card rewards such as cash back, it's important to note that the rewards are given based on where you make the purchase - not what you buy. If you earn a higher cash back rate at gas stations, for instance, everything you buy at a gas station (e.g., snacks, beverages, gift cards and more) counts.
One thing to keep in mind with cash back rewards cards is that carrying a balance month to month removes the benefit you'll get with cash back rewards. If you're paying more in interest than you're getting in cash back, then there's really no benefit to you in the end.
Therefore, a cash back secured credit card is ideal for people who are able to pay their balance in full each month.
4. The Best Card for People Without a Checking Account
OpenSky Secured Visa Doesn't Require You to Have a Bank Account
The OpenSky® Secured Visa® Credit Card doesn't require a checking account for you to qualify. This is great news for anyone who's unable or unwilling to obtain a bank account. Instead, you can submit your security deposit through a wire transfer, check, or money order. There's an annual fee of $35. Your credit limit can range from $200-$3,000.
Most secured credit cards require you to have a checking account. Some banks will even require you to have an account from the bank you're applying for a secured card from. That's what makes this card unique - whether or not you have a bank account (or where you bank) doesn't factor into your approval.
Bad Banking History Affects Your Ability to Get Secured Credit Cards
Why does it ever matter if you have a bank account to get a secured card? Because most banks want to see a positive banking history before they approve any type of credit. Therefore, many people who've had had mishaps with bank accounts in the past have to turn to prepaid debit cards as a result.
How does this all work? Just like how the FICO score works with measuring our credit history, we all have banking histories that are recorded. For example, ChexSystems is an agency that records consumer banking histories, and every consumer is entitled to one free ChexSystems report every year. Examples of banking infractions that are recorded include check fraud, frequently bounced checks, excessive overdrafts, and negative account balances.
If you don't have a checking account because of these or any other reasons, the secured credit cards that don't require a checking account are a great alternative credit option that will help you improve credit.
Tips on Using Secured Cards
In a word, opening a secured credit card is an opportunity. In fact, it's a golden opportunity. Anyone can use a secured credit card to create a credit history or to repair broken credit simply by using their card responsibly. This is an easy, accessible way to build good credit to eventually qualify for traditional credit cards at low interest rates.
You can’t go wrong with the trio of cards we’ve reviewed here, and we recommend doing more research. It's important to find the right secured card that suits your lifestyle and financial needs. Remember, this is a chance to get in control of your credit.
To make the most informed choice, keep these factors in mind:
1. Secured Credit Cards are Not Prepaid Debit Cards
It can be easy to confuse secured credit cards and prepaid debit cards. After all, they both require you to put down a deposit before you can use them. Here's the difference:
On a debit card that you’ve deposited $1,000 on, the money is depleted until you reach zero dollars. Think of it like a gift card - they work the same way. But on a secured credit card, the credit limit you set is held by your card issuer as collateral. Even though that deposit you put down is cash, you're still making your purchases on credit. Your deposit, in the case of a secured credit card, is simply insurance for the lender. If you default, they can keep that money. If you don't, you get it back when you close the card.
2. It's Important to Ensure Your Payments are Reported to the Credit Bureaus
What would be the point of using a secured credit card if your credit behavior went unnoticed? Unfortunately, some secured credit card providers don’t report your activity to TransUnion, Experian, or Equifax. This nullifies your credit improvement efforts. In this case, your secured card is no better than a debit card.
Before you select a secured card, check first with the issuing bank or company to see if they conduct credit reporting. Without it, you can be making your monthly payments on time and it won’t make one difference to your credit score.
3. Watch out For Scams
Signing up for any random secured credit card could subject you to an assortment of scams. For example, many cardholders discover that they can only use their card to purchase unwanted items from a specific website or catalog. Of course, you won’t be told this until after you’ve made your deposit. You should also watch out for any card that requires you to call a 900 number. These scammers make their money charging for the phone call (often up to $50) and won’t issue you a card in the end. Always do your research on a card before you apply.
4. Read the Fine Print on Fees, Deposits, and Other Details
Don’t get stuck with a secured credit card that doesn't have a policy on deposits or payment periods. You could be at a loss if you make a large security deposit and discover you can only get it back by closing your account. Likewise, always confirm what the payment grace period is. A typical unsecured card will give you this period (for example, two weeks from the statement date) to make a minimum payment without interest. But if your card doesn’t offer one, you’ll owe interest on your balance the second you put money on the card.
5. Don’t Stay on Secured Credit Cards Forever
Responsible use of a secured credit card should eventually qualify you for a traditional, unsecured card. Even better, you may be eligible for traditional credit card quicker than you might think. You can use your secured card for as long as you like. But remember that, with most secured cards, you won’t receive benefits like cash back, rewards points, or other rewards inherent to many traditional credit cards. It’s up to you to keep checking your credit and applying for unsecured credit cards as your score improves. Soon, you’ll be approved for one with the excellent credit you built thanks to the help of your secured credit card.
Secured Credit Card
|Credit Card||Notable Feature||Who It's Best For|
|Capital One Secured||A secured credit card with an extremely low initial deposit requirement to help rebuild credit immediately.||People who have poor credit and don't have a lot of cash for a big security deposit.|
|Wells Fargo Secured||Offers the potential of a very high credit limit for a secured card.||People with bad credit who have the funds for a large security deposit.|
|Discover it® Secured||Secured credit card that can help rebuild credit with no annual fee.||People with bad credit who want to repair their credit profile while also earning cash back on spending.|
|OpenSky Secured Visa||Does not require a bank account.||People with bad credit who don't have a bank account.|