February 10, 2020
A secured credit card could be a good alternative to an unsecured card if you’re new to credit or trying to improve a poor credit history and are unable to qualify for an unsecured card. It can help you learn how to use credit wisely while building or rebuilding your credit.
So, how does it work? Let’s take a look.
To get a secured credit card, you’ll need to complete an application just like you would for any other loan or line of credit. If your application is approved, you’ll typically be required to make a refundable deposit that will be used as collateral on the account.
In general, the deposit amount will be equal to the credit limit of your card. The amount you’re required to deposit varies based on the card-issuer and your credit history. Some card-issuers may increase your credit limit after several months of on-time payments.
After you receive your card, you can use it to make purchases up to the amount of your credit limit. At the end of each billing cycle, you’ll receive a statement with your total balance and the minimum payment amount due. When you receive your bill, you have until the due date to pay it and keep your account in good standing. If you don’t make your payments, the card-issuer will apply the deposit to any outstanding monies owed.
When you think of credit cards, you probably think of the unsecured variety. Unlike a secured card, an unsecured credit card does not require any collateral. This is because, based on an applicant’s credit history, credit score, income, and other factors, the card-issuer has determined the applicant is likely to pay them back for purchases made without the added security of a cash deposit.
Because they’re not backed by collateral, unsecured cards are generally more difficult to obtain than secured cards. But if you do qualify for an unsecured card, you’ll usually have a higher credit limit than you would with a secured card.
Issuers of secured credit cards typically report your payment history to the three major credit reporting agencies each month. If you can’t qualify for an unsecured card, a secured credit card could help you establish a solid credit history or rebuild one that’s taken a few hits over the years. But only if you use it responsibly.
Here are two tips to help you make the most of your secured credit card:
Some credit card issuers have programs that give you an opportunity to “graduate” to an unsecured card and have your security deposit returned to you after you make a certain number of payments on time. If this is important to you, ask your card issuer if they have such a program before applying for their secured card. If they don’t have such a program, know that a solid credit history built with their secured card should still make you more attractive to other card issuers when it comes time to apply for an unsecured credit card.
While an unsecured card may be preferable because you don’t have to tie up cash to get one, a secured card can be a good option if you simply don’t qualify for an unsecured credit card. The good news is, with responsible use of a secured card today, you should be able to improve your chances of qualifying for an unsecured card in the future.
Jennifer Brozic began her writing career at seven years old, when she scribed the epic tale of her kite-flying (and skyward-looking) uncle crossing paths with a deep hole in a sandy beach. After earning a degree in journalism, Jen worked in the insurance and financial services industries before earning a master’s degree in communication management. She left the nine-to-five corporate world in 2010 and has been freelance writing ever since. Her areas of expertise include insurance, financial planning & budgeting, and building credit.
Think a secured credit card might be right for you? Confused about the differences between secured credit cards and unsecured credit cards? Or the difference between secured credit cards and debit cards?
A secured credit card is a good way for those with little or no credit history to build credit. But there’s one major difference between a secured and an unsecured, or traditional, credit card. A secured credit card requires that some security, or collateral, be tied to it to minimize the card issuer’s risk. This collateral is in the form of a monetary deposit, which the card holder is required to make before they can start using a secured credit card. This deposit is typically equal to the credit limit of the secured credit card.
If you’re in the process of trying to build—or rebuild—your credit, you may’ve discovered that it’s tough to do so without actually having any credit. Most credit card companies want to see that you’ve demonstrated responsible credit usage prior to granting you a credit card, but how are you supposed to demonstrate responsible usage if you don’t have any credit to use responsibly?