Having access to credit is important to help you improve your credit score. You have to be able to borrow money in order to pay it back on time and prove you’re a responsible borrower. Unfortunately, this creates a catch-22 because it can be hard to get approved for your first credit card or to get approved for a card if you have past credit mistakes and are trying to rebuild your score.
The good news is, there are options out there to get credit even with no credit history or a low credit score. One of those options is a secured credit card. Secured credit cards can be a powerful credit-building tool, but you need to make sure you understand how they work and find the right card for you.
So, what is a secured credit card, how can you find one, and how can it help you build credit? This guide will explain everything you need to know.
- What is a secured credit card?
- Why would you apply for a secured credit card?
- Do secured credit cards help build credit?
- How quickly can a secured card improve your credit?
- How do you get a secured credit card?
- How to compare secured cards
- Can you get more than one secured credit card?
- The difference between secured credit cards and prepaid debit cards
- Is it better to have a secured card or an unsecured card?
- Tips for getting a good start with your secured credit card
What is a secured credit card?
A secured credit card is a credit card where you put up collateral. In most cases, the collateral is money you deposit into a special account with the credit card issuer. Collateral guarantees anything you borrow will be repaid because if you don’t make payments, the card issuer can just take the money in your special account.
Most credit cards are unsecured, which means the creditor has to rely on your promise that you’ll make payments. Creditors that don’t want to deal with the hassle of trying to collect on unpaid debt will try to screen out people who are likely to default. They use your credit score and other financial metrics to predict the likelihood you won’t pay what you owe — so if you have low credit, you may not get approved.
Secured credit cards eliminate the risk to the lender. Since the lender has a legal ownership interest in the deposited money, the lender doesn’t have to make collections calls, sue you, or garnish your wages to get paid back if you don’t pay what you borrowed. It’s easy for the creditor to just take the money securing the card if you default. Because there’s no risk, lenders are willing to give secured cards to people with bad credit or no credit.
When you get a secured card, your credit limit — the maximum amount you can borrow — is typically equal to your deposit. So, if you put down a $500 deposit, you could get a secured card with a credit limit of $500.
Other than putting this deposit down, secured cards work the same as any other card. You can borrow up to your maximum credit limit at any time. And, as you pay back what you’ve already borrowed, you can put new charges on the card. Just as with any other card, you’ll pay interest on the borrowed amount if you don’t pay it back in full each billing cycle, and you’re expected to make regular monthly payments once you’ve borrowed.
Your behavior with the secured card, including the amount of available credit used and your payment history, should be reported to each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. If you’re responsible with your secured card, this can help you develop a positive credit history.
Why would you apply for a secured credit card?
Most people apply for a secured credit card when they can’t get approved for a traditional unsecured credit card.
If you have no credit history and have never borrowed before or if you have a low credit score because of past missteps, a secured card may be your only option to get a credit card. And a secured card may be a far better and cheaper option than other types of debt offered to bad-credit or no-credit borrowers, such as high-interest loans with tons of fees.
Getting a secured card allows you to reap many of the benefits of being a credit cardholder. This includes putting deposits down on hotels and car rentals when using a debit card isn’t possible or desirable; making purchases and deferring payment until your statement comes; and potentially even earning rewards on your purchases, depending on which secured card you choose.
While secured cards typically don’t offer the same perks as many standard credit cards do — such as 0% promotional APRs, generous rewards, or cash back — they are a great starter card option.
Do secured credit cards help build credit?
Building credit is one of the biggest benefits of these cards and is one of the main reasons many people sign up for a secured card in the first place. A secured card can help you improve your credit score if you choose one that reports to the three major credit reporting agencies and if you’re responsible with how you use the card.
Two of the most important factors that determine your credit score include your payment history and your utilization ratio. Payment history is reported when you make payments each month on your card. If you pay your secured card on time every month, this record of steady payments will boost your credit score.
Credit utilization ratio, on the other hand, is the amount of credit used versus credit available. If you have a secured card with a $500 limit and have used $100 of credit, your utilization ratio is $100 divided by $500, or 20%. Maintaining a credit utilization ratio below 30% is ideal for earning a good credit score. Since secured cards often have very low limits — your limit is equal to your deposited funds — it’s important to keep your balance very low.
Many secured card issuers do allow you to raise your credit limit over time, which can help with your utilization ratio. And, if you’re responsible with making payments, the card issuer may even convert the card to an unsecured card. This means you’d no longer have to keep a deposit with the creditor but would still have access to credit.
How quickly can a secured card improve your credit?
You can’t build a good credit score overnight — it takes time for your record of positive payments and responsible borrowing to raise your score. The amount of time it will take to improve your credit score will vary depending on whether you started out with no credit or with bad credit.
When you have a record of negative remarks on your report, it’s going to take more time for positive borrowing behavior to impact your credit score. And, depending on what negative information is on your report, those black marks could remain for as long as seven to 10 years. Your score can still go up during that time if you’re responsible with new credit, but it will be a slower process.
If you’re starting with no credit, getting a secured card will help you to improve your credit score faster. You won’t have negative info to overcome, so your record of positive behavior with the secured card can quickly help establish that you’re someone creditors can trust.
How do you get a secured credit card?
Applying for a secured card is similar to applying for any other type of credit card. The easiest approach is to apply online. You’ll need to provide some basic details, including your name, address, date of birth, and Social Security number. Some card issuers also have additional requirements, such as having an open bank account.
When you apply, the card issuer will check your credit. This is a hard inquiry. Inquiries go on your credit report when you ask for credit and stay on your report for up to two years. Too many inquiries can hurt your credit score, so you don’t want to apply for lots of unsecured cards at one time.
Once the creditor has checked your credit, you’ll get a decision on whether you’re approved or denied. Because the card is a secured card, it’s much more likely you’ll be approved compared to an unsecured card. The creditor will also let you know how much you need to deposit and how to make your deposit to complete the process of opening the card.
How to compare secured cards
Not all secured cards are created equal, so it’s important to shop around and find the right card for your needs. Some of the key things to consider include:
- APR: Annual percentage rate is the cost to borrow. While you shouldn’t generally carry a balance on a secured card, it’s important to know the rate you’ll be charged if you don’t pay off your card in full each billing cycle.
- Annual fee: This is the amount paid for the card. Some secured cards charge annual fees while others don’t.
- Whether your account will be reported to credit reporting agencies: If it won’t, you don’t want to sign up for the card as it won’t help you build credit.
- Whether you can transition to an unsecured card: If you can’t transition to an unsecured card, you’ll eventually have to apply for a new unsecured card and close your old secured one if you want your deposit back. Closing an old account could hurt your credit score, so it’s a strength when a card can transition.
- Card rewards: Some secured cards, such as the Discover it Cash Back and SKYPASS Secured Visa, provide the opportunity to earn rewards for spending.
- Other cardholder perks: Some secured cards offer other benefits, like the chance to check your credit score and monitor how it’s improving over time.
You don’t want to just sign up for the first secured card you see. Instead, compare all of these features to find a card that best aligns with your goals. The table below has some cards to start with when looking for a secured card.
|Card||Annual fee||APR||Can transition to unsecured card?||Special features|
|Discover it Secured Card||$0||22.99% (variable)||Yes||2% cash back on purchases at restaurants and gas stations (up to $1,000 quarterly), and 1% cash back on all other purchases; get free Social Security number alerts if your number shows up on the dark web|
|Secured MasterCard from Capital One||$0||26.99% (variable)||Yes||Your security deposit could be below your credit limit, depending on your credit history; you can pick your own payment due date|
|OpenSky Secured Visa||$35||17.39% (variable)||No||No credit check required; credit limits as low as $200 and as high as $3,000|
Can you get more than one secured credit card?
It’s possible to apply for more than one secured card, if you want to do so. You may decide to do this to have more credit available than one card issuer is willing to provide, to take advantage of particular cardholder perks available on different cards, or because you find a better secured card than the one you currently have open.
Just be aware that you’ll have to apply separately for each secured card, and each will require its own separate deposit. Having several secured cards could result in tying up a lot of your money in credit card deposits.
Each card has pros and cons that you will want to consider. For example, the First Progress Platinum Prestige Mastercard Secured Credit Card has a low APR yet it also has an annual fee. So make sure you factor all of the various costs into your choice to get more than one secured credit card.
The difference between secured credit cards and prepaid debit cards
One key thing to understand about secured cards is that they work differently from prepaid debit cards, even though both types of cards can be swiped to pay for purchases.
Prepaid debit cards function as an alternative to a traditional bank account. You can sign up for a card and add money to it as needed. Depending on the card, you may be able to add funds via direct deposit, by sending in a check, or by reloading the card at a retail store. You can then swipe the card when you want to pay for purchases.
With a prepaid debit card, you don’t have a line of credit as you do with a secured credit card. You’re simply spending money you loaded on the card. Once you’ve spent the money on the card, you don’t get to spend more until you reload it. Since you aren’t borrowing, prepaid debit cards won’t make reports to credit reporting agencies.
With a secured card, you have to deposit money equal to your credit limit, as already mentioned. But you aren’t “loading” your credit card with this money for you to spend, as you do with a prepaid debit card. The money just stays in an account to protect the lender in case you default.
When you swipe your secured card to pay for a purchase, you’re borrowing from the card issuer — and you have to pay back what you borrowed. As you pay down this balance, your credit line becomes available to borrow from again. This is why a secured card helps you build credit while a prepaid card doesn’t.
Is it better to have a secured card or an unsecured card?
If you have good or excellent credit, you’d usually be better off with an unsecured credit card than with a secured one. After all, you’d have more of a choice of credit cards, including those with generous rewards, and you wouldn’t have to tie up money for a deposit.
But if you have a lower credit score or no credit, a secured card could actually be better for you than an unsecured one. That’s because people with imperfect credit can sometimes be classified by lenders as “subprime” borrowers — and card issuers often offer very unfavorable terms to subprime borrowers, such as extremely high interest rates and fees.
You’ll need to see which cards you can qualify for and which ones offer the best deal for your particular situation to decide what’s best for you. As you compare the costs of an unsecured versus a secured card, remember it can be far better to make a deposit you’ll get back for a secured card than to incur a high annual fee you can’t recover with a subprime card.
Tips for getting a good start with your secured credit card
You want to use your secured card as effectively as possible to help you build your credit. Some of the key ways to do that include:
- Keeping your balance low: You want a low balance to have a good credit utilization ratio.
- Paying all bills on time: It’s imperative to show you’re responsible with paying on time if you want your credit score to improve. A late payment on your secured card would only hurt your score further.
- Being proactive: Regularly reach out to your credit issuer to see if you can get your APR reduced, your credit limit raised, or your card converted to an unsecured card.
By choosing the right secured card and being responsible with how you use your card, you can ensure that your new secured credit card is a powerful tool that helps you earn a credit score you can be proud of.