Six Ws about secured credit cards

When can a secured credit card come in handy?

Any future plans to purchase a home with a mortgage loan? Or take out a loan to finance your kid’s college? Or simply get your dream vacation for free with rewards from a luxurious travel credit card?

Lenders normally check your credit history before giving you access to their money. They request your credit report from a credit bureau and closely examine it for your overall credit score, late or missed payments, the amount of debt and similar records. Such information helps lenders gauge their risks with you as a potential borrower:

  • When lenders see your high credit score and responsible debt repayment, they are ready to deal with you. And you get a credit card with no fees, low rates, high credit limit, rewards and other perks.
  • When your credit score is low or credit history contains records about bankruptcy or debt collection (or you have no credit history at all), you look like a risky borrower. And lenders try protecting their money with higher rates, additional fees and limited credit lines. Or if risks are unacceptable to lenders, there can be no credit cards available to you. Except for maybe one — a secured credit card.

What is a secured credit card?

A secured credit card may look like a credit card which allows you to borrow and use your own money. But it’s not exactly like that. Before getting such card, you do have to pay a deposit. And, in most cases, the amount of your deposit becomes your credit line. So the money you borrow from the lender is secured with your deposit, which is kept in a savings account. Thus, lenders protect themselves from potential losses. Later, after seeing your responsible use of credit, some lenders may upgrade your card to an unsecured one (return your deposit) or increase your credit limit without asking for additional deposit.

So at first sight, a secured card may hardly seem an attractive credit product, since it doesn’t give you access to any extra funds exceeding your deposit. But that’s not what such cards are geared for. Their purpose is to help you prove your creditworthiness when you have no other means to prove it.

Using a secured card is like undergoing a probation period. If you follow basic rules for at least six months, i.e. make minimum payments on time and use up to a third of your credit line, you may improve your credit score enough to qualify for an unsecured card responsibly.

Who may qualify for a secured credit card?

The greatest advantage of secured credit cards as a tool is their accessibility. Anybody, who is older than 18 years of age (21 in some states) and has a SSN, can qualify for one. That includes recent bankruptcies and legal immigrants. Anybody, at any moment, can apply for one of such credit cards to build their credit or rebuild it from scratch.

How does a secured credit card work?

Let’s stress again, a secured credit card is not for using credit, it is for building credit. And yes, you have to make a deposit, and if you carry balance, it looks like you’re charged with interest on your own money. But, by the way, the solution is simple, pay off your balance in full each month.

But unlike debit or prepaid cards, secured credit cards are real credit products. And their issuers, as any other lenders, send monthly reports about your card usage to the three main credit bureaus — Experian, Equifax, and TransUnion. In particular, such reports include data on whether you make your minimum payments on time, how much of credit you use and so on. The bureaus collect reports about you from different lenders to produce (or update) your credit report and calculate your credit score. So when you apply for other credit products, your potential lenders contact one of the bureaus and see the updated information about your creditworthiness.

Where can I get a secured credit card?

You may get a secured credit card from:

  • Major banks. They normally have no annual fee offerings, standard credit card perks and even rewards programs. Some banks offer also secured business credit cards;
  • Local banks may offer more credit cards for bad credit;
  • Online issuers normally have no credit check offers, and you can submit your secured credit card application within a couple of minutes;
  • Credit unions may tolerate bad credit and offer lower rates to their members.

Why should I take a secured credit card?

So once again, why secured? Because you can always qualify for one, whatever fiasco you’ve gone through. That’s your chance to enter or re-enter the credit world.

Best ways to use your secured credit card

Since secured credit cards are geared for credit building, by using them you should stick to the healthy credit principles. Only in this case, secured cards can become a powerful, cheap and quite fast tool for working on your credit.

Normally, you need as little as $200 to get a secured card and half a year of time to boost your credit score with its help.

Follow Golden rules

Your credit score is a product of credit bureaus. It is calculated according to complicated formulae. Nobody knows the exact calculation process, but the principles of good credit and key components of the credit score are well-known. Based on this information, we have written down two main rules for you; they are simple and quite obvious:

  • You should always pay on time. Always. You can either pay off your balance in full each month or carry balance and make only minimum payments. It doesn’t matter what you choose. But do pay on time.

Ontime payments are the most important factor influencing your credit. They make about 35% of your FICO credit score and about 40% of your Vantage credit score.

  • You should use only up to a third of your credit line. Since in the most cases, your credit line is equal to the deposit of your secured credit card, you have quite a modest amount at your disposal. For example, if you have paid the minimum $200 deposit, you can use not more than $60. Thus, you can charge your lunch costs to your secured credit card or buy your morning coffees with it.

The amount of your credit line you use is called credit utilization rate. And this is the other major factor influencing your credit score. Credit utilization rate makes up about 30% of your FICO credit score and 34% of your Vantage credit score.

These two rules allow you to keep under control up to 74% of you Vantage score and up to 65% of your FICO score. Below you can compare two main factors, influencing scores in the two most popular scoring models:

Note, that the scoring models differ a little bit, and Vantage has three components depending on credit use: Available credit — 3%, Balance — 11%, and Credit utilization rate — 20%.

Other factors include the length of your credit history, variety of credit products and the number of recent credit inquiries.

Build credit using credit cards

Build your credit from scratch on your own

If you are new to credit but you are at least 18 (21 in some states) years old and have a SSN, $200 and half a year of time, all you need to start building credit is a secured credit card. Please check our reviews on secured cards for credit novices for the best offers available to you.

Once you’ve got a secured card, you should use it — pay for something with it and then repay the balance. No repayment means no credit history. Do it very accurately. Never be late with payments and never miss one. Otherwise, you’ll not only waste your time but will do something quite opposite to your plans — spoil your credit.

There may be different strategies, but they all are based on our Golden Rules. See below what your card usage may look like:

MONTHLY REPAYMENT

Paying once per month is easy, only if you use your card once per month. Otherwise, you must always remember your payment due date — the day when you should pay off your balance. Also, before charging new expenses on your secured card, you have to remember what your current balance is and whether you can afford to pay with your card without exceeding a third of your credit limit. To manage your card better, you may set up Autopay to prevent late payments and decide in advance what small purchases you can make with your secured card every month.

INSTANT REPAYMENT

The instant repayment approach is much more flexible. You charge small purchases (not exceeding the golden third of your credit limit) to your secured card and then repay this amount within the next few days. This allows you to charge another lunch to the card on the same week (and repay it) without using too much of your credit line. It’s safer for your growing credit and easier for you to keep your first credit card under control.

By the way, both strategies are about paying the balance in full each month, not making just minimum payments. Doing so, you can avoid paying interest for ‘using your own money.’

Use other people’s credit to build yours

COSIGNING

If you don’t want to pay a deposit but cannot qualify for a decent credit card on your own, you may find a person with good credit history and ask this person to become your cosigner. Banks consider if that person (not you) qualifies for their credit card offer, they will give you the card.

Impact on credit: In this case, both of you share equal legal responsibility for the card usage. This credit card account will be reported to both credit reporting agencies and will affect the credit scores of the cardholder and the cosigner.

AUTHORIZING

If you don’t need credit but only credit card benefits, you may ask your relatives or close friends to make you an authorized user of their credit card. In this way you’ll get access to their line of credit and may be able to use some credit card benefits.

The primary cardholder may receive a bonus for adding an authorized user.

Impact on credit: If you are an authorized user of a card, you take no legal responsibility for its usage — the primary cardholder does. But some banks report account activities even to authorized user’s credit report. This is how you may contribute into your credit history while using the other person’s card. However, remember that this contribution may be also negative, and that depends entirely on the other person.

Rebuild credit with credit cards

Secured credit cards are equally good for growing credit and for repairing it. Since you can influence the most vital elements of your credit score: payment history and credit utilization (balance-to-debt) rate. But if your credit history is not newborn but rather experiencing a middle-age crisis, you may have to apply different strategies.

Bankruptcy or debt collection

Bankruptcies and debt collection do happen. They are considered to be major credit damages since they stay on the credit report for many years. In particular, the record about a charged-off account stays for seven years, the record about Chapter 13 bankruptcy stays for seven years and the record about Chapter 7 bankruptcy — for 10 years.

However, these events don’t mean the end to your financial and credit life. You still can work on your credit recovering, and the best part is that you can start immediately. And here come secured credit cards. Some of such cards have no credit check, so they are accessible even to recent bankruptcies.

Once you’ve got the card, follow the same Golden rules and apply the same strategies as credit novices. Of course, in your situation, it will take longer than the standard half a year. But you will see the effect as time passes.

Multiple accounts and crippling debt

If your credit history is long and rich and now you simply want to improve your credit score to get better mortgage rates, a secured credit card can hardly make any difference.

APPLY GOLDEN RULES TO ALL YOUR ACCOUNTS

Still, you have to follow the same Golden rules:

  • Focus on ontime repayment of ALL your credit accounts. Better make only minimum payments but do make them on time.

Try to bring your utilization rate closer to the Golden one-third limit. To calculate your total credit utilization ratio, you should find out the balances and credit limits of all your credit cards. It’s not complicated. Simply request your free annual report from one of the bureaus or call the number on your credit card and ask a customer representative for such information. Once you know all the values, use our credit utilization rate calculator.

Use Credit utilization rate balance transfer calculator

If your total credit utilization rate is higher than 30%, our calculator also shows what your credit utilization may become after debt consolidation. If you have a lot of credit card debt, you may transfer it to a new credit account (with lower interest rate). It will increase your total line of credit at least for the amount of your debt, and therefore your credit utilization rate will go down to the number you see on the calculator.

CONSOLIDATE YOUR CREDIT CARD DEBT

To consolidate your credit card debt, you may consider the following options:

  • Balance transfer cards. If your credit is good enough, you may qualify for a zero interest balance transfer credit card. So you will not only reduce your credit usage, but also will be able to repay your debt faster because of no interest repayment.
  • Personal loans. If your credit is insufficient to qualify for balance transfer credit cards, you can try getting a personal loan. Personal loan lenders normally offer lower APR than credit card issuers. So you can use a loan to repay your credit card debt. This will reduce your credit usage and simplify debt repayment due to fixed payments at a lower APR.

Whichever debt consolidation tool you use, remember to keep your old credit card accounts open. Yes, you’ve repaid their balances. And no, you shouldn’t use them again, at least until your credit score is good enough for your goals. These accounts are important because their credit lines help to keep you credit utilization rate as low as possible.

Card comparison for various credit scores and credit damages

Secured card categories

All secured credit cards can be divided into three groups:

  1. Credit cards for people with no credit or poor credit history. These are credit novices. They have no credit history at all or a very short one — up to 24 months. And yes, the number of credit accounts may also matter, especially if you have fewer than five accounts. Banks consider applicants with insufficient history as something uncertain, and offers may vary significantly. Among the best offers of credit cards for no credit, there is the Discover it® Secured Credit Card. Pick it if you want to enjoy rewards programs from the very beginning of your credit life. And Capital One offers the secured card with low deposit — you can start with as little as $49.
  2. For people with a fair credit score. Almost all secured cards are available to a fair credit score. While choosing the most suitable one, look for zero annual fee. In the future, this will help you avoid closing your secured credit card. Additionally, do your best to get the card from one of the major U.S. banks — Discover, AmEx, Capital One or Citi. This may play to your advantage when you are ready to apply for a better card for the same bank.
  3. No credit check offers for recent bankruptcies or other serious credit damages. Secured cards are so accessible to everyone because of no credit check offers. If you’ve just filed for bankruptcy, you can start to consider credit cards to rebuild credit. Check, for example, the OpenSky® Secured Visa® Credit Card, which is a very decent no credit check option. Unfortunately, such cards normally charge an annual fee. But if your bankruptcy occurred at least two years ago, you may qualify for a no annual fee secured card from Capital One. Do consider different offers, and you’ll find your ideal match.

Secured credit card comparison

Credit card

Annual fee

APR

Deposit v/s Credit limit

Good for

No annual fee offers

Discover it® Secured Credit Card

$0

23.74%

An initial line of credit starts from $200, secured with an equal deposit.

After a 7-month period, you may qualify for an upgrade to an unsecured card

For fair, poor, no credit score

Secured MasterCard® from Capital One®

$0

25.49%

For an initial credit line of $200, you have to pay a deposit of either $49, or $99, or $200

For poor, limited, no credit score

Citi® Secured MasterCard®

$0

23.49%

An initial line of credit starts from $200, secured with an equal deposit

For fair, poor, limited, no credit score. Bankruptcy is allowed in the past 2 years

No credit check offers

OpenSky® Secured VISA®

$35

18.39%

An initial line of credit starts from $200 (and up to $3,000), secured with an equal deposit

No credit check.

Any credit score is acceptable, no accounts are required

primor® Secured Visa Classic Card

$39

14.49%

An initial line of credit starts from $200 (and up to $5,000), secured with an equal deposit

No credit check. For fair, poor, limited, no credit score

primor® Secured Visa Gold Card

$49

10.49%

An initial line of credit starts from $200 (and up to $5,000), secured with an equal deposit

No credit check. For fair, poor, limited, no credit score

Merrick Bank Secured Visa® Card

$36 for the 1st year;

$3 monthly fee from the 2nd year.

18.45%

An initial line of credit starts from $200. Then the Merrick bank deducts the $36 annual fee from your deposit, and the remaining amount becomes your credit line.

No credit check. For fair, poor, no credit score.

Other secured credit card offers

BankAmericard® Secured Credit Card

$39

21.24%

An initial line of credit starts from $300 (and up to $4,900), secured with an equal deposit. After a year your deposit may be returned

For fair, poor, limited, no credit score

USAA Secured Card American Express®

$35

10.9% – 20.9%

An initial line of credit starts from $250 (and up to $5,000), secured with an equal deposit

For fair, poor, limited, no credit score

U.S. Bank Secured Visa® Credit Card

$29

19.99%

An initial line of credit starts from $300 (and up to $5,000), secured with an equal deposit.

After a 12-month period, you may qualify for an upgrade to an unsecured card.

For poor, limited, no credit score.

As you can see, there are a few options with zero annual fee available (mostly no credit score credit cards). However, they charge rather high interest rates, which is important if you are going to carry a balance. Secured credit cards with a $30 to $50 annual fee offer a lower APR and are more easily accessible — there are even no credit check offers. The minimum deposit can be as low as $49 in the case of a semi-secured card from Capital One and as high as $300 in the case of the U.S. Bank secured card and the Bank of America secured card.

Decide on what is more important for you, pick the card and start working for your credit.

Pros & Cons

  • Available to people with ruined or no credit history;
  • Available to recent immigrants and bankruptcies;
  • Effective credit establishing or re-establishing tool;
  • No annual fee offers available;
  • No credit check offers available;
  • In some cases, an automatic upgrade to unsecured credit card is possible.
  • No or very little rewards available;
  • Low credit limit;
  • Deposit required;
  • In most cases, the deposit you pay defines your line of credit;
  • Comparatively high regular APR.

The bottom line

Secured credit cards come in handy as the first and the very last means of credit establishment. They may help you grow new-born credit, as well as recover it after a bankruptcy or debt collection. Of course, they are not a magic pill but rather the first step to the better future, once major problems are settled. And remember that secured cards are effective only when you know what you are doing and keep you card use under close control.

If you are ready to work on your credit for at least half a year, find $200 to pay a deposit, pick the best secured credit card available to you and start your credit recovery.