- A secured credit card is a type of credit card with a line of credit backed by a security deposit.
- Because it doesn't require a credit history or credit score, secured credit cards are an appealing option for building a credit history.
- But secured credit cards charge higher annual interest rates and fees compared to traditional credit cards.
Have you ever wondered how the best secured credit cards help people build financial stability and creditworthiness? Whether you're starting from scratch or repairing your credit score, understanding the ins and outs of secured credit cards is crucial.
Not all secured cards are created equal. Take your time to compare the features and benefits, along with the terms and conditions of different cards.
Understanding Secured Credit Cards
Definition and Basics
Secured credit cards, in essence, are tools designed for building or rebuilding credit. Unlike their unsecured counterparts, these cards require a deposit which typically sets the limit of your credit line. This deposit acts as a safety net for issuers, making secured cards more accessible to those with less-than-perfect credit scores. In fact, most credit card companies won't perform credit checks for secured credit card applicants.
Differences from Unsecured Cards
While unsecured cards are based on your creditworthiness, secured cards offer a different approach. The security deposit ensures that lenders have a reduced risk, allowing individuals with lower credit scores to step into the world of credit.
Credit Utilization Ratio
One determining factor of your credit score is the percentage of available credit you use, ideally under 30%. This number is also known as your utilization ratio. The higher the security deposit, the more you can use your card without putting your credit score at risk. You'll be able to get this back.
How Do Secured Credit Cards Work?
Secured Credit Card Mechanics
When you open a secured credit card account, you're required to deposit a sum of money. This deposit usually determines your credit limit. Essentially, you're borrowing against your own money, while also building your credit history.
Traditional, unsecured credit cards use undisclosed mathematical algorithms that rope in credit score, income, and payment history to determine your credit limit. Alternatively, your credit limit on a secured credit card will be how much you deposited. Credit card companies hold this money as collateral if you default your credit card or rack up severe delinquencies.
Required Security Deposit
The deposit is typically refundable and varies from one card issuer to another. It's crucial to understand the terms associated with the deposit to ensure you're making a well-informed decision.
Assuming you make your payments on time, the credit card company will return your security deposit when you pay off your remaining balance and close out the card.
Secured Credit Card Benefits
Building or Rebuilding Credit
Secured credit cards are a powerful tool for building or repairing credit. Regular, on-time payments can significantly improve your credit score, opening doors to more financial opportunities. After a certain amount of time and credit built on the secured credit card, companies may also allow you to convert your secured credit card to a traditional card, at which point your security deposit will also be returned. However, an upgrade isn't guaranteed.
Controlled Spending
The deposit-based credit limit on secured cards helps foster disciplined spending habits, ensuring you don't spend more than you can afford.
Choosing the Right Secured Credit Card
What to Look For in a Secured Credit Card
Before choosing a card, consider factors like fees, interest rates, and the credit limit. Additionally, ensure that the issuer reports to the major credit bureaus to make your responsible usage count.
Comparing Options
Some of the best credit cards for bad credit are secured credit cards designed to help users work on their budgeting skills. The Discover it Secured credit card and the Capital One Quicksilver Secured card are two of Business Insider's top picks.
How to Use Secured Credit Cards Effectively
Spending Habits
To make the most of your secured card, keep your utilization low and pay your bills on time. This demonstrates your creditworthiness to lenders.
Payment Strategies
Aim to pay your balance in full each month to avoid interest charges and build a positive payment history.
Potential Pitfalls
Fees and Interest Rates
Be wary of cards with high fees or interest rates. These can erode the benefits of the card if not managed carefully.
Misconceptions about Credit Building
Remember, being a secured cardholder doesn't automatically improve your credit score. Using the card responsibly is key.
Transitioning to an Unsecured Credit Card
When and How to Upgrade Your Card
Many credit card issuers allow secured credit cardholders to upgrade to an unsecured credit card after a period of consistent, timely payments and responsible usage. Upgrading to an unsecured credit card means your cash security deposit will be returned to you, and the upgrade is often considered a sign of improved credit health. The best issuers automatically upgrade secured cardholders to an unsecured product after a certain amount of time has passed, usually between six months to one year.
What to Expect When Upgrading From A Secured Credit Card
Transitioning to an unsecured card often comes with a higher credit limit and more benefits. However, it's important to maintain the disciplined habits you've developed; don't start carrying a balance.
Secured Credit Cards and Your Financial Health
Long-Term Benefits
A well-managed secured card can lay a solid foundation for your financial future, reflecting positively on your credit report.
Monitoring Your Credit Score
Regularly monitoring your credit score helps you understand the impact of your financial decisions and guides you towards healthier credit behavior.
Secured vs. Unsecured Credit Cards
Secured credit cards and unsecured credit cards occasionally share a product name, but they can have very different usages and limitations.
Secured Credit Cards
- Often do not require a credit check
- Accept applicants with low credit scores
- Require cash security deposit to set credit limit (within a specified range)
- Often charge higher interest than unsecured credit cards
Unsecured Credit Cards
- Typically require a good credit score at minimum, and prioritize applicants with excellent credit scores
- Issuer determines credit limit based on a number of internal considerations
- Interest rates vary based on the strength of your credit profile
What is A Secured Credit Card? Frequently Asked Questions
Yes — used responsibly, secured credit cards can improve your credit score by building a positive history of consistent use and repayment.
The credit limit of a secured credit card typically depends on the amount of cash you leave with the issuer as a security deposit. Common minimum deposits start at $300. Choose an amount that you're comfortable with and that reflects your spending habits.
No, secured credit cards are also a good option for people with no credit history or for those looking to rebuild their credit.
Yes, the deposit on a secured credit card is typically refundable, provided that you've paid off your balance and closed your account in good standing.
Maintain a history of on-time payments, keep your credit utilization low, and monitor your credit score. When your credit has improved, contact your card issuer about upgrading to an unsecured card.
