What Is a Secured Credit Card?

When a credit card is “secured,” it means money must be deposited with the credit card issuer in order to open an account. That money is known as a security deposit. And it’s held by the credit card issuer while the account is open, similar to the security deposit given to a landlord to rent an apartment.

A secured credit card can be a great option for people who are establishing, building or rebuilding their credit. And building credit through responsible use can make you a better candidate for things like mortgages, car loans and other credit cards.

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Advantages of Secured Credit

If you make your monthly payments on time, the card issuer may be willing to increase your credit line without you having to make an additional security deposit. Many secured credit cards will automatically increase your credit limit if you make your payments on time without fail for six to 12 months. In the meantime, you’re working on building a more positive credit history. Every time you make your payment on time, your credit score gets a boost, increasing your chances of eventually qualifying for an unsecured credit card.

Will Increasing My Secured Credit Card Limit Help My Credit Score?

In most cases yes, credit limit increases will help increase your credit score. 

This, however, only works if you don’t use that increased credit limit as a reason to increase your spending. 

See, your credit limits are an important factor in calculating the credit utilization part of your score. This is done by adding up all of the balances on your revolving credit lines and dividing them by the total credit limits. 

To keep the example simple, let”s say you only have one revolving account (your secured card) with a $500 limit and a $200 reported credit card balance. This gives you a credit utilization rate of 40%, which means you are currently using 40% of your available credit. 

Now, if you raised the limit on that card to $1000, then your credit utilization rate drops to 20%. This is great news for your credit score since a lower utilization rate equals a higher score. 

Before raising your credit limit, you should first check with the card issuer to make sure that there is not a hard pull of your credit involved. 

Also Read: Secured vs. Unsecured Credit Cards

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Why is it important for me to have good credit?

To be approved for loans and other financial products, you must have good credit. 

Having good credit will also help you when purchasing a home, car, or applying for insurance. Secured cards are available to people with low credit scores if they want better access to credit. The only issue is that it’s difficult to predict how much a secured card will improve your credit score.

Pros Explained

Secured credit cards can be a good option for building or rebuilding your credit. Five benefits stand out for consumers with blemished credit or no credit at all.

  • You can often get approved for a secured credit card when you can’t get approved for a traditional credit card. Paying the security deposit shifts the credit risk away from the credit card issuer.
  • They typically report to credit bureaus. Unlike a prepaid credit card which functions more like a debit card, a secured credit card will send your account history to the credit bureaus to be included in your credit report.
  • A secured credit card can help you establish or re-establish your credit. Since payments are included in your credit report, paying on time and managing your balance will help improve your credit score. After raising your credit score, you may be able to qualify for a regular credit card.
  • Your security deposit is used only if you default on your payment. Unless your defaulted balance is more than your deposit, you won’t get sent to collections for defaulting on your payments. Though the card issuer will keep your deposit, you don’t have to worry about debt collectors hounding you for missed payments on the card. The late payments still will hurt your credit score, however.
  • You can earn rewards on purchases with some cards, such as Discover and Navy Federal’s secured cards.

How Can I Get a Secured Credit Card?

The process for obtaining a secured credit card varies, so you’ll want to contact your financial institution to ask about their process. To obtain a secured credit card through Navy Federal, the process is simple. First, open a qualifying Navy Federal savings account if you haven’t done so already. Then, make a deposit of at least $200 into your savings account. Finally, submit your application for a secured credit card. Once approved, you’ll be issued a card with a credit limit equal to your deposit.

More good news—with Navy Federal’s nRewards® Secured credit card, you’ll enjoy a low interest rate and no annual, balance transfer or foreign transaction fees. You’ll even earn interest on your initial security deposit. Plus, Navy Federal’s secured credit card goes the extra mile: for every dollar you spend using the card, you’ll earn one rewards point that you can redeem later for cash back, gift cards or merchandise. Most importantly, Navy Federal reports all major activity to the credit bureaus, allowing you to build your credit history.

Is a Prepaid Card the Same as a Secured Credit Card?

No, a secured credit card and a prepaid card aren’t the same. A prepaid card isn’t a credit card but rather a reloadable debit card. A prepaid card won’t help you build or improve your credit score like responsible use of a regular credit card or a secured credit card will.

Secured Cards vs. Unsecured Credit Cards, Debit Cards and Prepaid Cards

When you pay for something, secured cards and other cards may seem the same. But there are some differences worth noting.

What’s the Difference Between Secured Cards and Unsecured Cards?

Secured cards and unsecured credit cards work similarly. The biggest difference between a secured and unsecured credit card is the security deposit. But rewards like cash back, miles or points may also be limited with secured cards.

Credit limits may differ, too. With a secured card, your credit limit may be based on the security deposit. But some secured cards offer opportunities to increase your credit limit. At Capital One, you could be automatically considered for a higher credit line in as little as six months.

What’s the Difference Between Secured Cards, Prepaid Cards and Debit Cards?

One big difference is that debit and prepaid cards may not be able to help you build credit. That’s because activity on those accounts isn’t usually reported to credit bureaus, according to the Consumer Financial Protection Bureau. Prepaid cards may also lack many of the security features of a credit or debit card.

Another primary difference between secured cards, debit cards and prepaid cards is where the funds used to pay for things come from. Prepaid cards are usually loaded with money ahead of time, and a debit card is usually linked to a checking account. But a secured card functions differently: The credit card company provides funding that you then pay back each month.

Which secured card is right for you?

There are a few things to consider when choosing a secured credit card: how much is the required deposit, how do you transition to an unsecured card (more on that below) and can you earn rewards?

One strong secured card option is the Discover it® Secured Credit Card, which requires a $200 deposit but comes with some good perks. You can earn rewards (2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter, then 1%, and unlimited 1% cash back on all other purchases automatically), there's no foreign transaction fees and there's no annual fee.

If you're looking for a card that requires a smaller deposit, you might want to consider the Capital One Platinum Secured Credit Card. If you qualify for the low $49 or $99 deposits, you'll still receive a $200 credit limit.

In Summary: Tips To Improve Your Credit Score

  1. Signup for Credit Karma, an easy-to-use and transparent one-stop shop: get your credit score, credit report, and credit monitoring.
  2. Download Tally, a credit card consolidation app that makes it easy to stay on top of your credit cards. Scan your cards and get a line of credit as well as manage payments.
  3. Signup for Experian Boost to include your cell phone and utility payments into the calculation of your credit score. This is huge because Experian won’t count missed bills, only positive history payments. 
  4. Get a Petal Visa Credit Card. All the perks and rewards of a credit card, except no fees and catered towards improving your credit score. 

Which banks offer secured credit cards?

Many banks and card issuers offer secured credit cards. If you have a preferred bank, consider asking whether they offer a secured credit card. Don't apply for a card without digging into the terms and conditions, however. Look at the APR, fees, and whether you can be transitioned to an unsecured card in the future.

Can I get my security deposit back?

Many issuers only allow you to get your security deposit back when you close your account. And you’ll likely only be eligible for a full deposit refund if your account is completely paid off. If you default on your account, the credit card company may use your security deposit to pay off the balance.

But a few issuers have programs that allow you to “graduate” from a secured card to an unsecured card — returning your original security deposit in the process. If this happens, it’s generally after a period of demonstrating an ability to pay your bills on time and in full.

Why You Don’t Need to Keep a Balance

As long as you use the card frequently, it is not necessary to carry a balance over from one billing cycle to the next. Paying off the balance right away not only ensures that you won’t get stuck paying interest, but it also keeps your credit utilization rate, or amount of available credit you’re using, low.

Your utilization rate, or balance-to-limit ratio, is the second most important factor in credit scores after payment history. The lower your utilization, the better, as it shows you’re not relying too heavily on your available credit. By making all your payments on time and keeping your balances low, you are working toward building a positive credit history. With time, the lender may be willing to convert your secured account to a regular unsecured credit card.

How to use a secured credit card to build credit

Do secured credit cards build credit? Yes, depending on how you use them. If you want to know how to build credit with a secured card, you’re going to need to understand the fundamentals of building good credit: making on-time payments, keeping your balances low and paying off your debts.

Building credit with a secured credit card is all about practicing those three habits. Use your secured card to make small everyday purchases and pay your statement balance in full every month. Avoid maxing out your credit card, and try to pay down any debts you had before you took out your secured card. The more work you put into actively building your credit, the faster you’ll achieve a good credit score.

How to build credit with a secured credit card

Whether you’re starting to build your credit from scratch or, like myself, trying to fix it after a series of credit mistakes, a secured credit card can offer help.

Here’s what you can do to use it for your credit’s benefit.

Find a good secured credit card

Like any type of credit card, secured credit cards aren’t created equal. Pay attention to terms and fees. There’s no reason for a secured card to charge an annual fee, and some cards will also try to push hidden fees on you. Look for a card that will cost you only a security deposit.

My personal favorite secured credit card is the Discover it® Secured Credit Card. It’s the unicorn of secured cards since it offers cash back rewards: 2% back at gas stations and restaurants (up to $1,000 in purchases per quarter) and 1% on everything else. All the cash back you earn in the first year with the card also gets matched.

Practice good credit card habits

A secured card offers a chance to demonstrate responsible credit behavior. Do so by always paying on time and using less than 30% of your credit line for good credit utilization. For example, if your credit limit is $300, avoid having a card balance over $90 at any time. Paying in full multiple times a month can help you keep your balance under control.

The best practice is never to let the balance roll over to the next month. Not only will this ensure good credit utilization, it will also allow you to avoid expensive interest charges and credit card debt.

Ask for a product change

After your credit score has increased, it may be a good idea to call the issuer and ask for a product change. The issuer may be willing to upgrade you to an unsecured version of the card or a different card altogether. It may be possible even if your credit isn’t good yet, but you’ve been consistently showing good credit behavior for a year or two. Issuer loyalty often pays off.

Keep the card open

Even if you haven’t graduated on to a better card, keep your secured card open after it’s done its job. You may have more exciting cards now – and your credit may be good or excellent – but don’t give up on your old secured card (unless it charges fees). You can use it for minor charges, like your Netflix subscription, to keep it active.

Closing a credit card isn’t good for your credit, since it could negatively impact your credit utilization and lower the average age of your accounts. I’d suggest waiting a few years before closing your old card to soften the blow.

How Do Secured Credit Cards Help Build Credit?

A secured credit card account can help you build your credit in multiple ways. 

For instance, let’s say that you are just starting out on your credit journey and have only a loan account reporting (i.e. student loan). Qualifying for an unsecured credit card may be difficult, so you decide to start with a secured card. 

You put a $500 security deposit down in exchange for a $500 credit limit. 

If you pay your statement balance in full and on time every single month, this will provide a boost to the payment history portion of your score, which has the biggest impact on your credit score (35%). 

Next, you decide to only charge your $50 water bill to the card each month. This gives you a utilization rate of only 10%, which is the ideal level for maxing out the credit utilization part of your score. 

For each month you have the secured credit card account open, you’ll be building your length of credit history

And since you already have an installment loan, adding a revolving account (secured credit card) will improve the credit mix portion of your score. 

Now, if you have bad credit, how a secured credit card can help your credit score changes a little bit. 

Why do you have bad credit?

If you are carrying too much debt, a secured credit card can help your utilization rate, which will improve your score, but you can supercharge your progress by also working on paying down your existing debts. Aim for a utilization rate of 10% or less for best results. 

When you’ve missed a monthly payment on a bill or credit line, it can really damage your score. And these late/missed payments or collections will, unfortunately, remain on your credit report for a while. 

By paying your new secured credit card statements on time every month, as well as all other credit lines, you will be able to build your credit score back up. 

Now, let’s look at the worst-case scenario for a minute. 

Your bad credit comes from a bankruptcy, where the result was the closure of all of your existing accounts. 

When it comes to your credit, you’ll need to start over from scratch and with your bad credit history, you’ll likely find it difficult to get banks to trust you. So, how do you build credit fast? 

Like we hinted at above, a good solution would be to open one credit-builder account and three secured credit cards. These are products that you can easily qualify for even with bad credit, and when used properly, this method can get you to a good credit score within one year. 

Also Read: What Is a Secured Credit Card?

The bottom line

Building credit with a secured credit card is an important step in getting your finances back on track. Use these tips to help you establish a positive credit history, transition to an unsecured credit card and work your way toward all of the benefits that good credit has to offer.

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