What is a secured credit card?
A secured credit card requires you to deposit a certain amount of money in an account before you can use the card. Though it varies by company and by credit card, you may have to deposit an amount equal to your credit line. This money is used as collateral to protect the credit-card company in case you don’t pay your bills.
Because there’s very little risk to the credit-card company, people with poor credit stand a much better chance of being approved for secured credit cards. Every card issuer will have different criteria, but applicants approved for several popular secured cards had average credit scores in the mid-500s, according to Credit Karma. Some successful applicants even had scores in the 400s.
What are the pros of secured credit cards?
Though they’re known as a “last resort” of sorts, secured credit cards have a number of advantages. These include:
- Easier approval: If you’ve tried and failed to obtain an unsecured (or traditional) credit card, you know how frustrating that process can be. You’re much more likely to be approved for a secured credit card if you have bad credit or no credit.
- A way to build or rebuild your credit: Your card issuer will probably report your account activity to the credit bureaus. Assuming you use the card responsibly, this will help you start to boost your credit score, which can affect everything from how cheaply you can borrow money to where you live and work.
- A path to an unsecured credit card: Some credit-card companies will let you “graduate” to an unsecured card after you’ve used a secured credit card responsibly. You may not even need to reapply.
- Built-in discipline: If you’ve had problems with overspending in the past, a secured credit card’s low limit will limit the damage you can do to your finances.
What are the cons of secured credit cards?
Of course, secured cards aren’t on the top of most credit-card wish lists because of their unique requirements and limitations, which include:
- High interest rates and fees: In many cases, you will be paying a much higher APR than holders of unsecured cards — over 20% is not uncommon. Some secured cards also have higher-than-usual fees, which may include an annual fee as long as you have the card.
- You have to come up with a deposit: If you’re strapped for cash, it may be tough to set aside a few hundred dollars for your secured credit card. You also risk losing the deposit if you fall behind on payments.
- Low credit limit: Even if your credit-card issuer extends your credit limit beyond your deposit, it may be much lower than what you would get with an unsecured card and a better credit score. Though this can protect you from overspending, it also limits your spending power in case of emergency expenses.
How does a secured credit card stack up against a prepaid debit card or a personal loan?
You may be wondering why you would choose a secured credit card when a prepaid debit card
would also give you the convenience of plastic without the hassle of applying for a credit card. After all, you still have to set aside your own money for the secured card’s deposit, so why bother?
First, remember that you can actually raise your credit score with a secured credit card because the card issuer will report to credit bureaus. That’s a huge benefit if you’re committed to using your card responsibly, and one you won’t get by simply using a prepaid debit card. You may also boost your chances of getting an unsecured card with the same issuer.
Second, there are fringe benefits to credit cards, even secured cards. Many cards have built-in perks such as purchase protection, which means your card issuer will reimburse you for certain items if they’re damaged or stolen within a certain period after purchase. Some may also extend manufacturers’ warranties. Your card may also insure you for certain travel expenses such as an interrupted trip or lost bag. These are advantages a prepaid debit card won’t give you.
Finally, it may be easier to understand the fees associated with a secured credit card because they’re required by law to be disclosed in a certain way. You may not realize the full range of fees associated with a prepaid debit card because each company can present the information in different ways.
Another way you can get funds with bad credit is by applying for a bad-credit personal loan.
With bad credit, you’re typically going to be securing this loan with collateral that the bank can seize, such as your car, home, or other high-value possessions. You may be able to get a much larger loan than your credit limit on a secured card, and you won’t have to part with a big chunk of money as a deposit.
However, your APR will probably be at least as high, if not higher, than what you can get on a secured credit card. If you miss payments, you also may risk losing collateral much more valuable than a few hundred bucks.
If you do decide to look into a personal loan instead of a secured credit card, be sure to steer clear of predatory lenders. These include payday lenders, auto-title lenders, or any lenders who use high-pressure tactics to close a deal or guarantee that you can get a loan without checking your credit.
How to use a secured credit card responsibly
Credit-card companies risk little by issuing secured credit cards, but you risk making bad credit even worse if you don’t use the card responsibly. Here’s how to do that:
- Avoid carrying a balance. This is particularly important with secured credit cards. That’s because your APR is likely to be fairly high. If you absolutely can’t afford to pay your whole balance, at least pay more than the minimum payment due to save on interest and show credit bureaus you’re serious about debt.
- Don’t miss any payments. This is critical when you want to build your credit score, because your payment history — that is, whether you’ve paid your bills on time — determines 35% of your credit score. Missing payments can also mean you’ll have to pay a late fee on top of the payment you already owe, and your card issuer may hit you with a higher penalty interest rate, too.
- Use your card every month. It may seem obvious, but to demonstrate responsible credit usage, you’ll actually have to use your credit card frequently. One easy way to do this is to pay a couple of consistent monthly bills with your credit card.
How to shop for the best secured credit card
If you’re convinced that a secured credit card will help you reach your financial goals, now it’s time to find the best one you for you. Here are five tips to keep in mind while you’re shopping:
Tip #1: Make sure your activity will be reported to the credit bureaus.
This is probably the most important thing to look for when you shop. If your credit-card issuer doesn’t report your account activity to the credit bureaus, you’ll be missing a huge opportunity to demonstrate financial responsibility and boost your credit score.
Tip #2: Look for a card with low fees.
It is more common to pay an annual fee with a secured credit card, but it should be reasonable — under $40 or so. Avoid cards that have an application fee; most reputable issuers won’t charge you to apply.
Another fee to avoid is any sort of monthly account maintenance fee. And if a card issuer pushes you to buy any sort of insurance policy or other add-on to get approved, consider that a huge red flag and walk away.
Tip #3: Ask when you can be considered for an unsecured credit card.
Some credit-card companies will automatically review secured accounts after a certain period, such as a year. At that point, you may be offered the opportunity to convert your card into an unsecured credit card or apply for a new one.
Tip #4: Make sure you have a grace period.
Your grace period is the time between the end of each billing cycle and the date your payment is due. During that period, you can pay for what you’ve charged without paying any interest. Almost all cards have a grace period, but it’s always worth double-checking. If you do have a grace period, it’s legally required to be at least three weeks long.
Tip #5: Ignore rewards.
Most secured credit cards don’t offer much in the way of rewards, but if you find one that does, be careful. Rewards can tempt you to spend more than you should in an effort to obtain points or other perks.
When you have a secured credit card, your only goal should be to show you’re a responsible user by charging a reasonable amount each month that you can pay off in full.
How I chose the best secured credit cards
To determine the best secured credit cards, I looked at the following criteria:
- Credit-bureau reporting: I didn’t consider any card that doesn’t report your account activity to all three credit bureaus.
- Credit limit: I looked for cards that allow you to build up to higher credit limits of at least $3,000. I also gave bonus points for cards that didn’t always require a dollar-for-dollar match between your deposit and credit limit, meaning you could potentially be approved for a limit greater than your deposit.
- Unsecured card availability: I looked for companies that explicitly detailed a method or timeframe for secured-card holders to move up to an unsecured card.
- Reasonable fees: It’s typical for secured credit cards to have an annual fee, but it shouldn’t be much more than $40. I also looked for cards without monthly maintenance fees or application fees, and gave bonus points to cards with no foreign transaction fees.
- Reasonable APRs: While this would be one of the most important factors on any other credit-card list, it was a minor consideration for secured credit cards. That’s because APRs are generally high in this category, and using a secured credit card properly means you’ll be paying off your balance before you need to pay interest on purchases. However, bonus points went to cards with lower APRs for purchases and no penalty APRs.
- An opportunity to earn interest: Some card issuers put your deposit in a savings account or CD that can earn interest while you have the card. While that’s unlikely to be a significant amount, it’s better than nothing.
- A long grace period: Credit-card companies are not required to offer a grace period, but most do. I looked for cards that not only had a grace period, but a longer one than the required 21 days.
- Additional perks and protections: I looked for cards with built-in features such as purchase protection, fraud protection, travel accident insurance, and extended warranties.
The best secured credit card can be a powerful financial tool.
Secured credit cards represent an opportunity to build or rebuild your credit. While you won’t have the lower APR, higher credit limit, and rewards that are common with unsecured cards, you probably won’t miss these perks if you use your card strategically and responsibly.
For anyone with a military affiliation, we highly recommend the USAA Secured Card® American Express® Card
and the USAA Secured Card® Platinum Visa®
. Otherwise, you’ll want to identify what matters most to you in a secured credit card. If it’s low fees, try the Capital One® Secured MasterCard®
; if you want a low APR, look at the First Progress Platinum Prestige MasterCard® Secured Credit Card
. If you’re serious about quickly graduating to an unsecured credit card, consider the U.S. Bank Secured Visa® Card
If you want to learn more about your credit score, what affects it, and how it affects you, you’ll find everything you need to know in our credit score guide
. And if you’re interested in other financial tools that may be available even if you have bad credit, we also offer guides to the best bad credit loans
and bad credit auto loans