The best credit cards are for people with the best credit scores. This fact is frustrating for people with bad credit scores. Fortunately, secured credit cards offer a straightforward way to rebuild or repair credit with financial responsibility. But what should you look out for when picking your next card? Here are our top tips on how to choose a secured credit card.
What to Look for When Picking a Secured Card
There are six key features to look for when choosing a secured card:
First and foremost, always ensure you meet the eligibility requirements before applying for any secured credit card. Secured credit cards might seem to be a sure thing – after all, your deposit equals the credit line – but there are plenty of reasons why your secured card application is denied.
Some banks have credit score requirements for secured cards, making some offerings more challenging than others. Additionally, many issuers have strict rules regarding customers. Credit unions, for instance, require you to become a member before applying, or national banks may deny applications if you’re past due on another account.
International students should pay particular notice to the eligibility requirements, as many banks do not accept applications without a Valid Social Security Number (SSN). Others, like the Deserve® EDU Mastercard, allow international students with a valid Individual Taxpayer Identification Number (ITIN) instead. An ITIN is an ID number the IRS issues to anyone who needs to file income tax returns in the United States but doesn’t qualify for an SSN.
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Affordable Security Deposit
What separates a secured credit card from an unsecured card is the security deposit. This deposit acts as collateral for the credit line, making lenders more willing to offer credit cards to people with bad credit scores.
Many secured credit cards require a deposit of around $200 to $300. Some credit union secured cards require a deposit lower than this. Generally speaking, however, plan for a minimum deposit of around $200. You can always deposit more (sometimes up to $5,000 for a personal card and about $35,000 for a business secured card), but for many, a minimum deposit is all they can afford to spend.
If affordability is an option, consider a card with a low deposit requirement. The Capital One Secured Card, Discover it Secured Card, and BankAmericard Secured credit cards all require just $200, making them accessible for people with bad credit and modest finances. Other popular cards, like Green Dot, First Progress, and OpenSky, also require just a $200 deposit.
Most secured cards come with a variety of fees, but make sure you don’t get a card with a ton of hidden fees or high charges for essential services. Many of the charges are avoidable under most circumstances. If you pay your bill on time, for example, you won’t have to worry about late fees, APR, or penalty fees.
One fee you may not be able to avoid is the annual fee. Many secured cards charge an annual fee. Costs vary but expect a yearly charge of between $25 and $99. Any annual fee over $50 is too much, as you probably won’t get what you pay for. Instead, aim for a secured card with an annual fee of $50 or less.
If you are paying a higher annual fee, make sure you get your money’s worth. The Merrick Bank Double Your Line™ Secured Visa® features a $36 annual fee but can help you bridge the gap between secured and unsecured by doubling your credit line after seven on-time payments – with no additional security deposit requirements. That impressive feature makes the annual fee worth it – but without an enticing offer like that, you should avoid cards with high fees.
Even if you plan to pay your statement balance on or before it’s due, having a credit card with a grace period is essential to protect against late payments. A grace period is between the statement date and the due date. You won’t pay any interest during this time if you pay your statement balance from the previous month in full.
Make sure to see that the credit card you want offers a grace period before applying. Not all banks provide a grace period. With no grace period, a secured credit card can get expensive fast since purchases start accruing interest from the transaction date.
Credit Bureau Reporting
Secured cards are primarily for building credit. As such, all worthwhile secured cards should report to the major credit bureaus. Experian, Equifax, and TransUnion are the three major credit reporting agencies, so make sure your card regularly reports to these bureaus. Making consistent on-time payments, paying statement balances in full, and keeping your credit utilization low are all keys to boosting your credit score.
Related Article: How Bad Is My Credit Score?
Chance to Upgrade
Some secured cards offer automatic upgrades. Discover, for instance, may upgrade the Discover it Secured Card to a Discover it Chrome Card in as little as six months. Not every credit card issuer offers a path to upgrading, though, so make sure to consider your future credit plans before applying.
Just because a bank or issuer doesn’t offer unsecured cards doesn’t mean you should avoid applying, however. Cards like the OpenSky Secured Visa don’t require a credit check and allow deposits of up to $3,000. Using cards like this, or even offers from Merrick Bank, First Progress, Self, or Chime makes sense for those who want a credit score boost.
If you have an average credit score in the 600s, an existing secured card can quickly boost your score by increasing the credit line with a large deposit. Add a few thousand dollars to your deposit, and a 650 credit score can become 675 or even 680 (good credit) in a few months. This boost comes from an increase in overall credit limits and a reduction in credit utilization.
Related Article: How to Bounce Back from a Subprime Credit Score
Things Not to Worry About
There are also things not to worry about when choosing a secured card. The biggest of these factors is rewards. There are secured cards with rewards, such as the Discover it. While the card does offer 2% back on gas and dining purchases, in reality, this won’t add much value. Given that many people will make a minimum deposit, the total amount of rewards available is likely $10 or so per year. Yes, this is still a reward, but is it worth it versus building your credit and getting a lower APR with another card?
Summing It Up
Before choosing a secured card, pay close attention to a few key features:
- Annual fee
- Hidden fees
- Minimum deposit required
- Ability to build credit quickly
There are many other factors to consider, such as APR (if you plan to carry a balance) and rewards. If you carefully consider the pros and cons and keep an eye on the bigger picture – your credit future – you can rebound from bad credit and move on to balance transfer cards, or even impressive rewards cards, shortly.
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