If you’ve had trouble raising your credit score or building your credit from nothing, a secured credit card may be the exact tool you need to help you do it faster. A secured card is a great way to establish some positive credit, but it’s certainly not for everyone. For example, if you foresee yourself having trouble paying your bill on time, you might want to wait until your finances are a little more stable before considering this option.
How Does a Secured Card Work?
A secured credit card is kind of like having practice credit. You will deposit your money in the bank where you receive the card from and that’s what they use to back your charges. You still have to make payments on your purchases, but this way, the credit card company has a secure means of collecting in case someone defaults.
Most companies that issue secured cards do not require a credit check or have a very low credit score threshold, so it’s ideal for someone who doesn’t have the credit to get an unsecured card.
How Does a Secured Card Help Rebuild My Credit?
Unlike a debit card, the secured card companies will report payments to the credit bureaus.
Making secured credit card payments on time will put some positive activity on your reports. So, if you have slow credit, no credit or damaged credit, this positive activity can go a long way towards boosting your score.
What Happens to the Money I Deposit for My Secured Card?
The issuing company will deposit your money in a savings account until you’ve proven your credit-worthiness. But each company offers different terms. Wells Fargo, for example, requires a minimum deposit and credit line of $300. They then keep your money in a non-interest-bearing savings account until your credit card is upgraded.
USAA, on the other hand, requires a minimum of $250 and keeps your money in an interest-bearing CD. Most also charge an annual fee, but that’s true of even unsecured cards.
Each company is also different in the way they decide when to give you your deposit back. Some say they will release your savings after you’ve paid on time for six months, and others run a credit check periodically and use a specific score to make that decision. Once you’ve earned your savings back, your credit card will be switched to unsecured and some companies may even bump your limit up.
Each company should have their guidelines clearly laid out and don’t be afraid to ask questions if there’s anything you don’t understand.
How Do I Qualify for a Secured Card?
Not all companies issue cards without credit checks. Even though you may have the deposit on hand, they each have their own criteria, such as minimum credit scores or having a bank account. Wells Fargo requires you to have a bank account with them to apply. You will need to check each lender’s requirements to see which card best fits your situation.
What is the Downside of Having a Secured Credit Card?
It’s important to know all the facts before making the decision to apply for a secured credit card. It does come with a few strings. For instance, even though most credit cards have yearly fees, a secured credit card may come with much higher ones. Nerd Wallet recommends never paying over $50.
With secured credit cards usually also comes higher interest rates. The companies that issue them also do not usually offer grace periods for them. Be sure when using a secured card, you make a habit of paying your entire bill every month to avoid high fees.
Another drawback is that if you’re currently having financial difficulty, it could be hard to come up with the cash to make that deposit, at least without using the entire amount of credit right away. We recommend stashing the amount of the deposit away until you have enough to safely use for your credit card without missing it. This way, you can make small purchases and pay it off so that you’re using it to positively impact your credit score.
Should I Apply for a Secured Credit Card?
Despite the drawbacks of using a secured credit card, it’s still a great way to build or strengthen your credit score if you can responsibly use it. And if you’ve had trouble getting a traditional credit card, this may be your only option at the moment.
However, if you’re not quite ready to be a responsible card owner or see yourself having trouble making on-time payments, secured credit cards could only serve to worsen your situation. It’s up to you to decide whether it’s the right move for you.
Building and repairing credit is no quick fix and, depending on your goals, you may need help speeding up the process. Secured credit cards are a good way to start, but be sure to research all your options before choosing the one that will work for you. It’s also always a good idea to look for customer reviews and make sure you are choosing a company with minimum complaints.
Use your credit responsibly and you will soon be on your way to a better score!