A secured credit card can give you the ability to build your credit history from scratch or rebuild your credit after it’s been hit. But with so many options to choose from, it’s easy to get overwhelmed.
Remember that the main purpose of a secured credit card is to help you improve your credit history to the point where you can benefit from better card options. So you don’t necessarily need to focus on the long-term value you can get from the card.
It’s important to consider the card’s benefits to ensure you’re getting the best experience and that your efforts are actually helping to build your credit history. Here are seven things to look for when choosing a secured credit card.
1. Credit reports
In most cases, credit card companies report your account activity, such as your balance and payment history, to the three major credit bureaus: Experian, Equifax, and TransUnion. If you get a secured credit card from a major card issuer, such as the Capital One Platinum Secured Credit Card or the Citi® Secured Mastercard, this feature is standard.
However, if you get a secured credit card from a lesser-known card issuer, your activity may only be reported to one or two of the credit bureaus. The problem with this is that your credit score is generated from information from credit bureaus. If you get a secured card from a bank that only reports to Experian and apply for a loan from a lender that checks your Equifax and TransUnion credit reports, for example, it will be as if all your hard work had never taken place.
It’s easy to find a secure credit card that doesn’t charge an annual fee, especially if you go with a major card issuer. But there are secure cards that charge an annual fee.
In some cases, these cards can compensate for this by offering a lower interest rate. For example, the First Progress Platinum Prestige Mastercard® secured credit card charges an annual fee of $49, but comes with an impressive variable APR of 9.99%.
But if you find a card that charges an annual fee and doesn’t give you anything of value in return, it’s probably not worth it.
In an ideal world, you wouldn’t have to worry about credit card interest rates. If you can pay your bill on time and in full each month, you can avoid interest charges altogether. But if your financial situation makes this difficult, try to get an APR as low as possible.
Note that there are unsecured credit cards you can get with bad credit, but you’ll have to watch out for exorbitant fees that can exceed the cost of a deposit. Some of these cards charge an upfront processing fee just to open the account and a monthly fee on top of their annual fee. In some cases, the interest rate can reach 30%, which is unheard of among the best secured cards. These cards are best avoided.
3. Grace period
A credit card grace period is the period between your statement date and your due date. During this period, you will not pay any interest as long as you pay your previous month’s statement balance in full.
If a credit card doesn’t offer a grace period (and some don’t), your purchases start earning interest from the date of the transaction. Without a grace period, a secured credit card can get expensive quickly, so getting a card that has one should be a top priority.
Fortunately, most of the best secured credit cards offer a grace period. But even with an account, it’s important to set up automatic payments on your account as soon as you open it, so you don’t accidentally miss a payment and get hit with interest and late payment fees.
4. Security Deposit Affordability
One of the main disadvantages of a secured credit card is the deposit requirement. Most people who are new to credit or have poor credit don’t have a lot of excess money that they can tie up with a credit card for several months.
Therefore, it is important to choose a secured credit card based on the affordability of the deposit. In many cases, you can find a card with a minimum deposit of $200 or $300, with your credit limit equal to the amount of your deposit. The Capital One Platinum Secured Credit Card is an exception, offering an initial limit of $200 for a deposit as low as $49, depending on your creditworthiness.
When comparing deposit requirements, it’s important to remember that a lower credit limit generally makes it more difficult to maintain a good credit utilization rate, or the percentage of your available credit that you are using at a given time. When you’re trying to build credit, it’s best to keep that rate as low as possible.
5. Upgrade Options
Historically, you couldn’t get your deposit back on a secured credit card unless you closed your account. But there are a few card issuers willing to upgrade your account to an unsecured card after a while.
With Discover it® Secured, for example, you can switch to an unsecured account and get your deposit back as early as seven months if you use your card responsibly and pay on time. The Capital One Quicksilver Secured Cash Rewards credit card is another example, although the card issuer does not disclose when an upgrade is possible.
Having a secured card that can be converted to an unsecured credit card is important as it gives you the ability to keep the account open, even after you have gone over it. Keeping old credit card accounts open can help boost your credit, especially if you have a positive payment history on the account.
6. Eligibility conditions
At first glance, it may seem that secured credit cards should guarantee approval. After all, you usually secure the entire line of credit with cash that the card issuer can keep in case of default.
But card issuers can still deny your application if your income or credit history doesn’t meet its requirements. For example, Capital One will not approve your request if you are overdue on another Capital One account.
Also, you usually can’t get a credit card if your credit report shows bankruptcy that hasn’t been discharged. Some card issuers may even have a waiting period after the release date.
When comparing your options, check to see if each card issuer has a pre-approval process that can give you an idea of your chances of approval. Also read the fine print or consider calling the card issuer to find out more about potential exclusions and if they apply to you.
If your credit situation is in dire straits, the OpenSky® Secured Visa® credit card could be a solid choice as it does not require a credit check to apply.
7. Card benefits
The ultimate goal of a secured credit card is to build or rebuild credit, but it doesn’t hurt if the card you’re using also offers rewards and perks along the way.
For example, Capital One Quicksilver Secured Cash Rewards credit cards offer 1.5% cash back on every purchase you make, a rate that rivals some of the best cash back credit cards on the market. Additionally, the card has no annual fee and gives you the option to get your deposit back without closing the account.
Likewise, the Discover it Secured card offers 2% cash back on up to $1,000 spent on quarterly combo purchases at gas stations and restaurants and 1% back on everything else. Additionally, Discover will match any Cash Back you earn in your first year to your account anniversary. The card has no annual fee.
Again, it can be easy to get distracted from your goal by bells and whistles, but if you’re disciplined and don’t let the promise of rewards lead to overspending, it can feel like the icing on the cake.
The bottom line
If you’re looking for a secure credit card to build or rebuild your credit history, avoid the urge to accept the first offer you see. Instead, take your time researching your options and comparing card features to determine which is best for you.
Although you probably won’t use your secured credit card forever, a good card can make your life easier and even provide added value as you work to build your credit.