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Having no or poor credit can seem like a trap. In order to build your credit, you need to get a new line of credit. Of course, no one is willing to extend you credit when you have poor credit. If you have poor credit or haven’t yet established a credit history or a credit score, you – and your credit – could benefit from a secured credit card.
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What is a secured credit card?
Issuers will give a secured credit card to basically anyone who breathes (unless you have a pending bankruptcy). Unlike traditional credit cards, which aren’t secured with any collateral, a secured credit card requires a security deposit, which becomes the basis of your credit limit. Other than that, you’ll make payments just like any other card. The deposit eliminates any risk to the card’s issuer, so it’s easy to get approved, even when you have bad credit.
How does a secured credit card work
1. Your deposit determines the card’s credit limit
With a secured credit card, if you have poor or no credit, the credit card company usually sets your credit limit at the amount that you deposited to qualify for the card.
The deposit amount for a secured credit card is typically low – ranging from $50 to $300 – but you can deposit more to receive a higher credit limit, too. For example, if you deposit $1,000, the card’s issuer will likely set your credit limit at $1,000.
2. You don’t need good credit to be approved
With traditional major credit cards, you generally have to have fair-to-excellent credit to be approved. You can get a secured card, however, even if you have poor credit – or no credit history at all.
That’s because with your deposited amount, the credit card issuer doesn’t assume the same risk as it would with an unsecured credit card. If you default on the account, the issuer will simply apply your deposit to the amount owed.
3. Secured credit cards have higher interest rates
A secure credit card typically has a higher interest rate than many non-secured cards. You can get around that, however, by paying off your statement balance each month so you don’t pay any interest.
Another plus of paying off the statement balance every month is that by doing so, you are establishing a solid and positive payment history, which accounts for around 35% of your credit score.
4. A secured card can help you build credit
Once you have a secured credit card, you can begin building a positive payment history on your credit report and working towards a better credit score. Remember, though, your payment history can also affect your credit score negatively if you pay late.
The safest way to build or improve your credit with a secured card is to keep your credit utilization below 30%– each month and pay off the total monthly statement balance.
5. Some secured cards allow you to “graduate”
Some credit card companies issuing secured credit cards may offer you the option of getting your deposit back after several months of making payments on time.
For example, when you have a Discover it Secured card, Discover reviews your account payment history automatically each month, starting at eight months, to determine whether it can return your security deposit and allow you to continue using the card as unsecured.
6. You can get your deposit back
As long as you’ve paid any balance, you will receive your deposit back when you close the secured credit card account.
Hopefully, the day will come when you do close the account, trading up for the kind of low-interest card with healthy rewards and benefits you can get approved for once you’ve improved your credit score by using a secured credit card responsibly.
How long does it take to build credit with a secured credit card?
The amount of time it takes to improve your credit depends on your situation. If you have years of bad history with credit, it’ll take longer than someone who has no credit.
On average, it takes six months for secured credit cards to start improving your credit. However, if you have no credit, you can see an improvement in as little as a month.
Some negative notes on your credit report like bankruptcies and late payments will take longer (7-10) years to improve.
Get professional help to clean up errors in your credit report.
Factors to consider when choosing a secured credit card
If this is your first card or a new card to help you rebuild from poor credit you will need to make a few considerations when applying for a secured credit card.
Choosing a card: Read the fine print and make sure you meet all the requirements. Make sure the card will fit your lifestyle. Consider the interest rates and all the add-on fees that are included.
- Annual fee
- Late payment fee
- Balance transfer fee
- Cash advance fee
- Authorized user fee
- Overdraft or Over limit fee
- Returned payment fee
- Foreign transaction fee
- Hidden fees
Applying for the card: Because there is an inquiry when you apply you don’t want to just sign up for every card you get an offer for. Remember, no more than one application every 6 months.
Determine your deposit amount: Consider your budget and spending habits when deciding how much of a deposit you want to set up. A 30% utilization ratio is ideal so make sure you have a large enough deposit to cover your budget.
Building credit by using credit cards responsibly
These are rules that apply to every form of credit be it a credit card or a loan. These habits should help you build and keep your credit healthy.
- Pay on time: Payment history is the most important factor of your credit score.
- Pay in full: If you have trouble budgeting send in weekly payments to make sure your utilization stays low.
- Budget your spending: You shouldn’t be charging what you don’t have to spend. If you haven’t allocated the funds in your budget consider if you really need to buy it.
- Place a small charge on the card: Use it or lose it. You can not build credit if you don’t use credit. Having access to it is not enough to improve your score. Creditors need to see you being responsible with credit, if you don’t use it they could cancel your card.
- Graduate to an unsecured option: As time goes by and your confidence grows with using a secured card, creditors will see you as less of a risk and you can eventually qualify for unsecured credit.
Best secured credit cards
Unfortunately, some secured cards are loaded with fees and other unfavorable terms. To find a card from a reputable provider and one that has a reasonable annual fee – and no monthly fee. There should be a standard grace period, during which you can pay your balance in full to avoid interest charges. Other nice features can include rental car insurance and even some rewards.
Here are some of the best-secured cards to help you build credit:
The perks: Earn 2 percent cash back on gas stations and restaurant purchases, and 1 percent on all other purchases.
Bottom line: This card also doesn’t have an annual or monthly fee. The interest rate is 25.24 percent.
The perks: You place a refundable security deposit of $49, $99, or $200 depending on your creditworthiness. But you receive a credit line of $200.
Bottom line: You can pay your balances in full to avoid interest charges or pay an interest rate of 26.99 percent. There’s also no annual fee.
The perks: Receive a credit line of $300 to $4,900, based on your how much you put down for the security deposit. After a year, you may qualify to have the security deposit returned – while you continue to use the card.
Bottom line: There’s a standard interest rate of 25.24 percent, and no annual fee.
The perks: Your credit line can be between $300 and $5,000 based on your security deposit.
Bottom line: You can pay your balance on time (you choose your payment due date), or pay the 21.24 percent interest rate. There is also a $29 annual fee.
The perks: This card has several things going for it, including points and travel discounts. In addition, you receive 5,000 points after your first use, as well as one additional point per dollar spent. It also offers a single 10 percent discount each year on LATAM Airlines ticket purchases up to $500. The minimum deposit is $300.
Bottom line: This card has a 25.24 percent interest rate. There’s no fee for the first 12 months with the card, but after that you have to pay $25 a year.
The perks: You can put down a security deposit as low as $200, and make your regular purchases. A major perk is the low-interest rate: 19.64 percent.
Bottom line: There is a $35 annual fee.
The perks: Pay an annual fee plus a security deposit that becomes your credit limit. This card has a 19.99 percent APR and reports to all of the major credit bureaus, and no credit check required.
Bottom line: There is a $29 annual fee.
Now matter what kind of debt you have, Debt.com can help you solve it.
Cameren Boatner contributed to this report.
Article last modified on January 19, 2023. Published by Debt.com, LLC