What is a secured credit card?
Unlike regular credit cards (unsecured credit cards), secured credit cards are bankrolled by you, not the card issuer. That means to open an account you’ll have to pay a security deposit that also serves as your credit limit, minus the fees. (If you deposit $400, then your credit limit is roughly $400.)
That makes secured credit cards far less risky for lenders. In turn, they don’t require an excellent credit score to qualify, and are a great tool for building or even repairing your credit history. If you use one correctly, you’ll also improve your credit score enough to qualify for a credit card with a rewards program.
No matter what type of card you have, always treat your card like cash.
It doesn’t matter what type of card you have or what your credit limit is: Don’t spend more than you can pay in full every month. If you carry a balance from month to month, you’ll risk paying a bunch in interest charges and further damaging your credit score — both of which can be a severe blow to your financial health.
What is a good credit score?
FICO® and VantageScore are the two most common types of credit scores. (There are many types of credit scores
.) Each one has a slightly different rating scale, but a credit score of 700 or above is generally considered to be good
. If your score is greater than 800, then you’re in excellent shape, and you don’t need to apply for a secured credit card; you’ll be able to qualify for one of the best rewards cards
on the market.
Keeping a healthy credit score is incredibly important in today’s economy. Having a low score can impact your ability to qualify for the loan you need to buy your first home or the vehicle you need to commute to work. And even if you do qualify, having a low credit score means you won’t receive the best rate that you could get.
Can I get a secured credit card with bad credit?
If you have poor credit, or no credit history at all, secured credit cards are one of the best ways to build or repair credit. Secured cards require you to put down a security deposit, and that means the approval qualifications are more relaxed than other cards.
But that doesn’t mean you’ll always be approved. If your credit history is filled with red flags, like bankruptcy or multiple missed payments, it can be difficult to get approved — even for a secured card.
Tips to remember when applying for a secured credit card:
It isn’t hard to apply for a secured credit card, but the most important thing to remember is to comparison shop and read the fine print. Not all secured credit cards are alike. You’ll want to look at:
- Annual fees: Not all secured credit cards have them, but some do, like U.S. Bank Secured Visa® Card ($29) and First Progress Platinum Prestige Mastercard® Secured Credit Card ($49). If you like those cards – for instance, you may appreciate that First Progress has a pretty low interest rate — and feel that they’re your best options, the annual fee may not bother you at all. If it’ll annoy you, you’d want to look for a secured credit card with no annual fee.
- Interest rate: It can sound kind of goofy – you’re making a deposit of your own money, and they’re going to charge you if you’re late in paying your own money back? But, yes. Yes, they will. So if you expect that you may sometimes carry a balance from month to month, be sure to pick a secured credit card with a reasonable interest rate.
- Rewards: Most secured credit cards don’t offer rewards — but some do, like Discover it® Secured, which offers 2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter.
- Fees: Are there a lot of fees? If a secured credit card has high fees or an awful lot of pesky little charges, that may be an understandable turn-off.
- Credit reporting: Assuming you want to build your credit and upgrade to an unsecured credit card eventually, make sure that the secured credit card you’re thinking of applying for will report your financial behavior to all three credit bureaus. You’d hope they would, right? And the best secured credit cards do — but some others don’t, so make sure you check. The U.S. Bank Secured Visa® Card is a good option for people working to not only build their credit but also to make the switch to a traditional card fairly quickly; after a year, you can request an account review to see if you can transition into an unsecured credit card.
Will a secured credit card raise my credit score?
It absolutely can, if used responsibly. Even though your deposit determines the credit limit with a secured credit card, it still has the potential to raise your score. This is because secured cards appear to credit bureaus like any other revolving line of credit. Just make sure you observe responsible credit use when making purchases and payments on your secured card. That means paying on time and, if possible, paying off your balance in full every month.
Will raising my credit score be faster or slower using a secured credit card?
In terms of credit building, a secured credit card is no different than using a nonsecured (regular) credit card. Used responsibly, you could begin to see your credit score improve in as little as six months.
Just be sure to keep your credit utilization ratio below 30%
. Since secured credit cards use your deposit as the credit limit, it’s easy to feel like you can max it out without consequences. But if you have a $250 credit limit, a month-to-month balance of just $80 will increase your credit utilization above 30%, and your credit score could be affected.
Tips for using a secured credit card to build or rebuild your credit:
- Have the right mindset for a secured credit card: If you’re going to apply for a secured credit card, you want to make sure that you’re in a financially good — or at least decent — place. In other words, are you paying off your other bills on time? Do you feel like you’re on track? You may have had some rough times that hurt your credit — are you past them? Because you can still end up paying interest and getting late fees with a secured credit card, even though you’re borrowing against your own deposit. You don’t want to get into a position where you’re missing payments and your secured card is costing you even more money and making your credit score worse.
- Make small purchases: This isn’t the time to max out your secured credit card. If you really want to show your card issuer that things are different, use your secured credit card regularly – but on small, necessary purchases you can pay off right away. Fill up your tank with gas or buy some cheese (we might be hungry as we write this), but then pay it off — preferably, immediately.
- Pay your bill on time: That’s pretty obvious, right? Your on-time payment history is the single biggest factor in your credit score. No need to elaborate. Just don’t be late with a payment.
- Don’t carry a balance: It won’t necessarily kill your credit score if you carry one, but it won’t help it, and raising your score is the goal, right? So beyond just making your payments on time, make sure you pay off the whole balance, every month. That will show your secured credit card issuer that you’re turning over a new leaf.
- Keep your credit utilization ratio low: We just mentioned this, but let’s say it again: Lenders like to see a credit card user, whether you have a secured credit card or an unsecured one, use no more than 30% of their available credit each month. So if you have a $200 credit limit, try to spend no more than $60 before you pay it off. Yes, it’s annoying, and it means you won’t be buying much more than a tank of gas at a time. But if you want to build your credit, lenders need to see that you have willpower and aren’t coming anywhere close to maxing out your card every month.
- Make sure your secured credit card reports to the credit bureaus: Not just two. Not one. All three of them. You can be the most responsible credit card user in the world, but it doesn’t do you much good if the credit bureaus aren’t getting any information about your balances and how quickly you pay them off.
Will closing a secured credit card hurt my credit standing?
It could, depending on the situation and a couple of key factors. You could be penalized for reducing the average age of your active accounts if your secured credit card was the first account on your credit report.
Additionally, if you’re carrying balances on other open accounts, closing your secured credit card — and losing the associated credit limit — might raise your average credit utilization, which could negatively impact your score. That said, you probably don’t want to be stuck paying annual or monthly fees on a card you no longer need. At the very least, try to make sure any other credit cards are paid off before closing your secured card.
What should I do if my application is denied?
If you’re denied credit, don’t fret. The first thing you should do is ask your lender why you were denied. If a lender denies you credit because of your credit report, the lender is required by law to provide you a free copy of that report. But if your denial is due to an error on your credit report, you can dispute the error
If that proves unsuccessful, consider going to your local credit union. Many credit unions offer share-secured loans and credit builder loans
, both of which are great for kickstarting credit repair. Call or visit the institution to see whether you qualify.
- Share-secured loans: Share-secured loans are similar to secured credit cards, but there’s no piece of plastic to put in your wallet. Once you deposit money into the account, you can borrow against it.
- Credit builder loans: Instead of getting a lump sum of money up-front like a shared-secured loan, you make regular payments that serve as a layaway of your money. Once you’ve made all the payments, you can access the loan funds.
For even more information about how to quickly repair your score, read our guide to building credit.