A secured credit card is similar to a traditional card, but it’s backed by a cash deposit that lenders use as collateral.
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A secured credit card is backed by a deposit, which enables lenders to provide secured credit cards to people with no credit history or bad credit. You can build your credit with a secured credit card by using the card regularly, paying off the full balance each month and keeping your credit utilization low.
Read on to learn more about what a secured credit card is, how it works and how you can use one to improve your credit.
What is a secured credit card?
A secured credit card is similar to a traditional card in most respects, except that the card is backed by a cash deposit that lenders use as collateral.
While not all lenders readily offer credit cards for people with bad credit or no credit, a secured credit card is considered lower risk since you are essentially borrowing money from your own cash deposit. If you don’t pay your bill, the lender can simply use your deposit to pay off the balance.
Here are a few key points to keep in mind with secured credit cards:
- Credit limit: The credit limit for a secured credit card is usually equal to the amount of cash you provide as a deposit.
- Annual percentage rate: The annual percentage rate (APR), or the interest that you’ll accrue by not paying your full balance each month, is typically higher on a secured credit card.
- Goods and services: Similar to a traditional credit card, a secured credit card can be used to pay for goods and services, including many bills.
By using a secured credit card with good credit habits, you can build or improve your credit history to help yourself get a better credit card or a loan.
What is the difference between a secured and an unsecured credit card?
The difference between secured and unsecured credit cards is that an unsecured credit card requires no deposit or collateral to open, while a secured credit card does. Think of your cash deposit as “securing” the credit you’ll use to make purchases.
How does a secured credit card work?
When considering secured vs. unsecured credit cards, you should know that a secured credit card works fundamentally the same way as an unsecured card, though it also has some unique features. Here’s how it works:
- Once your application is approved, your secured credit card requires a cash deposit.
- Your purchases are essentially backed by your deposit, which reduces risk for the lender.
- Payments made on the card don’t actually come out of that deposit—you’ll still pay your credit card balance out of your own money every month. Missed payments will still incur interest.
- You can make payments on a secured credit card the same way you would any other credit card.
- This option is especially useful for those looking to use a credit card to build credit.
As long as you pay off your balance, the deposit will be returned to you when you close the account. But if you don’t make payments on time, the deposit acts as collateral, and the lender will keep the deposit to pay what you owe.
Do secured cards build credit?
If you’re looking to improve your financial history, it can help to use a secured credit card for bad credit repair. They can also be a great option for those who want to get a credit card with no credit. Note, however, that in order to build your credit, you will still need to make on-time payments every month, because a missed or past-due payment can have a negative impact on your credit.
How long does it take to build credit with a secured credit card?
According to FICO, one of the primary credit score providers, new credit lines account for 10 percent of the score they give you. Building credit from scratch can take up to six months, and if you already have credit, it can take many months of consistent, on-time payments on your secured credit card to help boost your credit.
How to get a secured credit card
Secured credit card applications aren’t very different from unsecured credit card applications. If you decide this is the right choice for your credit-building strategy, the process should look something like this:
Step 1. Shop around
Start by looking for secured credit cards with no annual fees—or, if necessary, a low annual fee. If you’re concerned about affording the deposit, you may want to look for options with below-$100 minimums. It’s also worthwhile to prioritize cards with the lowest APR possible in case you need to make partial balance payments.
Step 2. Apply for the card of your choice
Applications can usually be completed online in just a few minutes. You’ll likely need to provide basic personal information like your address, phone number, Social Security number and income.
Step 3. Make an initial deposit
To open your account, you’ll need to make a deposit of no less than the approved minimum. This will either be the same amount or a little less than your credit line.
Step 4. Make additional deposits if desired
Your lender may permit you to make additional deposits to raise your credit line even higher.
Step 5. Make monthly payments
As with any credit card, you’ll need to continue making on-time payments—ideally in full, if possible—in order to maintain good standing and build up your credit.
Banks that offer secured credit cards and secured credit card examples
Most of the major national banks, credit unions and credit card companies offer secured credit cards, including Bank of America, Citi, Wells Fargo and more. Here are a few examples of popular options:
- No credit history needed: The Citi® Secured Mastercard® has no annual fee, offers a 22.74 percent APR and requires no credit history for application.
- Cash back: The Discover it® Secured Credit Card carries no annual fee, comes with a 23.24 percent APR and offers 1 percent cashback on all purchases plus an extra 1 percent on gas station and restaurant purchases.
- High credit limit, low APR: For those who can make a $500 security deposit, Capital One’s Platinum Secured Mastercard® offers up to a $25,000 credit limit with no annual fee and with a 9 to 18 percent APR.
- Credit union: Digital Federal Credit Union’s Visa® Platinum Secured Credit Card boasts an 11.5 percent APR and no annual fee but does require membership in the credit union and a $500 deposit.
How to use a secured credit card to rebuild credit
Once you have a secured credit card, you can begin using it to build or improve your credit, which could ultimately lead you on a path to a high credit score and the opportunity to get a car loan or mortgage. Here are a few tips for using your card effectively with the goal of building up credit.
Make sure your card issuer reports to the credit bureaus
There are three major credit bureaus that keep track of your credit history, so you’ll want to be sure your credit card issuer is reporting your payments so you can build your credit. Check the credit card agreement or call the card’s issuing financial institution to check before you apply.
Use your card regularly
Your card will only make an impact on your credit reports if you use it, so you’ll want to make regular purchases with it. However, it’s important to use your card responsibly, so aim for manageable purchases like groceries or small bills.
Keep your credit utilization low
One of the factors affecting your credit score is credit utilization, which is the ratio of available credit to credit you’re actually using. A low ratio suggests to creditors that you are a low-risk borrower, which can increase your score. We recommend using under 30 percent of your total available credit and paying off anything above that as quickly as possible.
Pay off your full balance every month
An important part of managing a credit card is paying off the full balance every month, which helps you avoid paying any interest or falling behind on payments. A late or missed payment can lead to a negative item on your credit reports.
Secured credit card vs. prepaid debit card
On the surface, a secured credit card may seem like the same thing as a prepaid debit card. However, there are a few key differences:
- Credit history: Debit cards do not contribute to your credit history, while credit card payments do.
- Deposit collateral vs. prepaid cash: A secured credit card does not actually use your deposit to pay your balance—unless the lender needs to use it as collateral for a missed payment. Prepaid debit cards draw from the deposited cash any time they are used to make payments.
Frequently asked questions
Why would someone use a secured card?
People with no credit history or a low credit score may use a secured credit card in order to build or rebuild their credit. This option can be easier to get for those without a strong credit history.
Do I get my deposit back from a secured credit card?
If your deposit isn’t used as collateral for a missed payment, you will get your deposit back when you close your account.
What is an unsecured credit card?
An unsecured credit card is simply a credit card that does not require a deposit to open.
Do secured credit cards build credit?
Secured credit cards do help users build credit if they are used responsibly. Regular, on-time payments help build credit. Missing payments on a secured credit card will still likely hurt your credit.
Who should consider using a secured credit card
Overall, secured credit cards offer an excellent way to build credit, especially for those who have no credit history or poor credit. However, once you’re able to qualify for a regular credit card, it’s often beneficial to do so, though you may want to consider consulting your financial institution first to make sure. Regular credit cards offer better interest rates and credit limits, and many also offer more cashback reward options.
If you’re looking to get a secured credit card to fix your credit, make sure to take a close look at your credit reports for any inaccurate information that could be bringing down your score. If you need assistance formulating a solid credit repair strategy, consider contacting the consultants at Lexington Law to get help addressing inaccurate or unfair negative items on your credit reports.
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Source: lexingtonlaw.com