What is a secured credit card?
A secured credit card requires you to make a deposit of your own money before the card will be issued to you. By placing a deposit of your own money it reduces the risk of the creditor when giving you a credit card.
The deposit you make is usually equal to the amount of credit you’ll receive. If you make a $300 deposit on the card, you’ll have a $300 credit limit.
Many secured cards will allow you to graduate to an unsecured card, or a higher credit limit once you’ve made a certain amount of on-time payments.
Secured Credit Card vs. Unsecured Credit Card
Unsecured credit cards don’t require you to make a deposit as a condition of getting approved for them. As a result, you’ll need to have a better credit score and better credit history in order to qualify for this type of card.
Unsecured credit cards will usually come with higher credit limits, lower rates, and better rewards programs. With a secured card your credit limit is directly tied to your initial deposit.
You can typically get a secured credit card even if you have bad credit and a low credit score. This is why secured credit cards are often used to rebuild your credit.
Secured Credit Cards vs. Prepaid Debit Cards
Prepaid debit cards are not the same thing as secured credit cards. They are usually accounts that are used as an alternative to a checking or savings account.
Prepaid debit cards don’t:
- Report to credit bureaus
- Require a deposit
- Help to build your credit
If you are looking for a secured credit card make sure that it’s not a prepaid debit card but a credit card that is going to report to all three credit bureaus.
How To Get a Secured Credit Card
In order to get a secured credit card, first, you need to find the credit card you are going to apply for. Capital, Discover, and other credit card companies all offer secured credit cards. Capital One and Discover offer online pre-qualification tools that won’t pull your credit before telling you if you qualify. This can be a huge benefit if your trying to improve your credit as hard inquiries can drop your score.
Once you’ve found a card you’ll need to:
Apply
The first step is to apply for the card, and wait to receive your approval. It’s important to note that when you apply for a credit card, you will receive a hard inquiry on your credit report, and those stay on your report for 2 years
Make Your Inital Deposit
Since it’s a secured credit card, you’ll need to make your deposit in order to complete the application. The minimum deposit is usually between $200 and $300 but you may choose to deposit more in order to get a higher credit limit.
How Secured Credit Cards Work
Secured credit cards work the same way unsecured credit cards work. The primary difference is that you make a deposit against your credit limit, unlike a normal card.
- You can use your card anywhere credit cards are accepted
- You pay off charges each month to reduce your balance
- Interest is charged for any purchases that you don’t pay off each month
- Making payments over time and not carrying a balance will improve your credit score
It is important to know that your deposit doesn’t count toward your monthly payments even if you get behind. This means if you don’t make your payments on time, or run up your balance, you will still get hit with fees, and dings to your credit report like a normal card.
The only time your deposit is typically refunded to you is if you cancel the card.
Can You Build Credit with a Secured Credit Card?
A secured credit card is a great way to build your credit over time. 35% of your credit score is made up by your utilization rate, and if you don’t have a credit card you aren’t getting the benefit of this.
In order to build your credit with a secured card:
- Make your payments on time: 30% of your credit score is your payment history
- Keep your balance below 10% of your credit limit: Utilization is 35% of your credit score, so keep your balances low by only caring $5 or $10 a month on the card.
- Time is your friend: The longer you make payments on time and keep your balances low the better results you’ll see.
You shouldn’t view a secured credit card as a way to finance purchases you can’t afford. Your card should be used for purchases you can pay back in full. Carrying a balance or failing to pay your card on time will have the opposite effect of building your credit.
Read: Can You Buy a Home With Bad Credit?
How Much Will A Secured Credit Card Raise My Score?
Secured credit cards help you build your credit score in two ways:
- Build Positive Payment History: When you make your payments on time each month you are showing the credit bureaus that you will make you payments on time. The more you build your payment history, the better your score improves. Payment history is 30% of your credit score.
- Show You Can Manage Credit: When you have a credit card, how you use the card tells alot to creditors. Your utilization rate or balance is 35% of your credit score. When you keep your balances low on your available credit, you tell the bureaus that you can be responsible with credit. Alternatively, if you run high balances on your cards, your scores will drop which signals potential financial issues like living above your means.
65% of the formula that is used to determine your credit score can be helped by getting a credit card. As long as you use your credit wisely you will build your score over time.
How Long Does It Take To Build Credit With a Secured Credit Card
How long it takes to build your credit will depend a lot on your credit situation. Those who will see the greatest impact on their credit will be those who have no credit or have no open credit.
It usually takes about 3 months for a credit card to start reporting on your credit report once you open it. So you can expect to wait at between 3-6 months to see any movement in your overall score.
No Credit History
If you have no credit history, getting a secure card will help you tremendously as you show you are responsible and build a positive payment history. It’s not unheard of with on-time payments and low balances to reach a 700 credit score within 6 months.
Bad Credit History
If you have a bad credit history, the time it takes to see improvement is going to be determined by your personal situation. With no current credit cards, you can begin to see impacts to your score in 3-6 months.
If you already have credit cards that are open, your best bet is to pay those balances or get them caught up. Secured credit cards work best for someone who doesn’t currently have an open credit card. Getting loans current and paying card balances down should be the first thing anyone with bad credit should do.
Related: How to Fix Bad Credit
What is the Best Secured Credit Card?
Which credit card is best is going to come down to a few different factors you need to consider. Credit cards are a loan product, so like any loan you want to choose the one that gives you the best terms or return on your spending as possible.
There are three things you need to consider when choosing which card is right for you.
Interest Rate (APR)
Your interest rate or APR is the amount you are going to have to pay each month for any balance you carry. Most likely any secured credit card is going to have an interest rate between 18% and 30%. These rates are not ideal, but if you are following the advice in this post, you should not be carrying a balance on these cards. Interest rate only matters if you don’t pay the card off minus a few dollars each month.
Annual Fee
Many of the secured credit cards you will find will come with pretty high annual fees. I’ve seen offers for cards with as much as $150 annual fees for cards with a $300 credit limit. If you have options, getting a card with the lowest annual fee would be of the most benefit.
Rewards
Finally, you may consider getting a card that provides decent reward points for using it. While the annual fee would be a bigger consideration, if you have two cards with similar annual fees, choosing the one with better rewards might be your best bet.
My two favorite secured credit cards are the Captial One Quicksilver OneSecured Card and The Discover It Secured Credit Card. These cards both allow you to earn reward points as you spend, plus have $0 annual fee.
Another benefit of these two cards is that you can often graduate into a nonsecured card once you’ve made 6 months of on-time payments.
Bottom Line
If you are wanting to build your credit, getting a secured credit card can help you do that. While having to come up with a deposit may seem frustrating, having the ability to rebuild your credit or build your credit is a huge tool in reaching your credit goals.
Spending your money wisely, keeping a low balance, and never missing a payment will allow you to build your credit over time, and use it to purchase a home.
