What Should You Look for in a Secured Credit Card?
A secured credit card can be a useful tool if you're looking to build a credit history. Since a refundable security deposit is held as collateral with these cards, they often come with more relaxed credit requirements.
But not all secured credit cards are created equal. Some come with better terms and benefits than others. Here are a few factors you'll want to pay attention to as you're shopping for a secured credit card:
Since some secured cards can be targeted toward borrowers with limited, poor, or damaged credit, some charge expensive annual fees. Additionally, some cards charge monthly "maintenance" fees or other charges that can't be avoided.
If you're someone with heavily damaged credit, it may be worth it to pay a small annual fee for a "no credit check" secured credit card. Otherwise, you'll want to avoid cards that charge fees as there are plenty of no-fee or low-fee options available.
Some of the best secured cards will promise to consider graduating cardholders to partially unsecured (by increasing the credit line) or fully unsecured version (by refunding the security deposit) of the card after a certain number of on-time payments.
For example, one card issuer will consider increasing a cardmember's credit line after just six months of on-time payments. And another card will begin reviewing accounts after just 8 months to see if they can be transitioned to a deposit-free version.
Other secured cards, however, offer no such clear graduation path. With some, in fact, the only way to get back your security deposit may be to close your account (which isn't ideal). When possible, opt for a secured credit card that includes a graduation component.
By definition, all secured credit cards will require a security deposit. But the deposit requirements with some cards are more manageable than others. According to the CFPB, most secured card deposits range between $50 and $300. So if a card issuer is asking for a larger deposit than that, you may want to keep looking for better options.
Hopefully, you won't ever have to pay interest charges on your secured credit card. But you'll still want to avoid cards that charge exorbitant rates. Compare the current rates of several secured cards to make sure that the one you apply for is near (or below) the average.
You'll also want to make sure that the card you choose has a grace period (a time in between the end of your billing cycle and due date when no interest is charged). And you'll want to stay away from cards that charge penalty APR.
For most people, the primary reason that they're considering a secured credit card is because they're looking to build a positive credit history. But your on-time payments can't impact your FICO® Scores if they don't show up on your credit reports.
That's why it's critical that you choose a secured credit card that will report your credit activity to all three major credit bureaus. If the card that you're considering doesn't openly advertise its credit reporting policy, keep digging until you confirm that the credit bureaus will be receiving reports on your card activity.
The credit limit on a secured credit card will usually be equal to your security deposit. This means that you'll typically be dealing with a credit limit of $300 or less. To keep your credit utilization rate below 30% on a card with a $300 limit, you'd need to spend no more than $90 per month.
However, some cards will allow you to make larger security deposits as high as $5,000. While having to put up more cash may seem unattractive at first glance, it would also mean a higher credit limit. And the higher your credit limit, the easier it will be to keep a low credit utilization rate.
If you have a large chunk of savings available to put down as a security deposit, it could be worth it in some cases. Also, know that some cards may offer credit limits that are higher than the cash deposit (making it "partially secured" from the start) to borrowers that qualify.
What about rewards?
You may have noticed that there was no discussion above about the importance of comparing secured credit card rewards programs. And there's a simple explanation for that—many secured credit cards offer little or no rewards. But if you're in the market for a secured credit card, earning rewards probably shouldn't be your priority anyway.