Secured credit cards are a good way for consumers with low or no credit, or who are looking to rebuild their credit, to get access to plastic, giving them an opportunity to build a better credit profile.
Secured cards are more common than you think. An Experian (EXPGY) study of Americans who own credit cards show 32% of them have owned a secured credit card, and 31% say a big reason they own a credit card is to build credit.
That's exactly what a secured credit card does, and building credit with a secured card is a big reason so many people - especially younger financial consumers - use secured cards.
What Is a Secured Credit Card?
A secured credit card allows people with poor credit or no credit to get a credit card, after putting down an initial deposit.
By and large, a secured card allows users to build better credit by making on-time payments on the card, after making purchases.
According to FICO (FICO) , which calculates consumer credit card scores, 35% of those calculations are based on timely debt payments. That gives secured card users an opportunity to build a stronger credit score by making their monthly card payments on time, with no late payments and no missed payments.
Once you're approved for a secured credit card, the deposit requested by the card provider will likely equal the amount of credit you're given on the card. Basically, the card company is holding your deposit as collateral, in the event you don't pay your card bill.
That cash deposit should actually work in your favor. Since you're putting a deposit down, any repayment risk to the card provider is decidedly in the "low" category.
That should increase your chances of being approved for a secured credit card.
Seven Things to Know About a Secured Card in 2019
Secured cards are similar to traditional credit cards, but with some variances. Let's take a look at how they work with these seven qualifiers:
1. You Need to Be Approved for a Secured Card
Like credit cards, you have to apply to get one. Your job is to review the best secured credit cards, and choose the one that meets your standard needs (low fees, a reasonable deposit minimum - between $200 and $300 seems to be the industry standard, and solid customer service are at the top of that list.)
2. You Need to Link the Card to your Bank Account
Once you're approved for a secured card, you'll need to link your card to your bank account. That means securely providing the card provider with your bank, bank routing number, and your checking account number. You'll need that to provide the needed cash security deposit.
If you can't make a lump sum payment for the entire amount, don't fret. Many secured card companies allow you to make regular installment payments to complete your security deposit obligation.
3. You'll Pay a Higher Interest Rate on Secured Credit Cards
Normal credit card interest rates range from 0% (for introductory offers) to between 12%-and-24%, depending on the card user's credit score. That is not the case with secured credit cards, which can carry interest rates of 27% or higher.
Why the high rate for secured cards? It's simple, really.
Creditors deem people with no or low credit as higher credit risks, and thus charge them more for approving them for a card. It's up to the card user to pay bills on time, stay below the credit limit, and be prudent with their card use. Do all that, and you'll eventually move up to a traditional credit card, with lower interest rates.
4. You Will Be Monitored by the 3 Major Credit Reporting Agencies
Secured credit cards are different from debit cards or prepaid credit cards in multiple ways. One big difference is that with a secured credit card, the card provider will share your account history and your monthly payment history with the three primary credit reporting companies - Experian (EXPGY) , Equifax (EFX) and Transunion (TRU) .
Keep this in mind as you use the card and make sure to make those monthly payments on time. The last outcome you want is a bad credit score because you either missed a payment or made late payments on your secured card.
Conversely, if you make your payments on time, you'll likely get a big kick out of watching your credit score move upward.
5. Start by Making Small Purchases on Your Secured Card
The goal with any secured credit card is to use the card sparingly, and above all else, pay off your monthly bills on time. Your action plan on that front is to make smaller purchases when you get your card - think $10-to-$20 or so.
In doing so, and paying your monthly bill in full, you're doing two wonderful things that will help grow your credit health - you'll avoid large interest rate payments and you won't be carrying a card balance. Credit reporting agencies will love you for that.
6. Pay Attention to Fees
You'll need to watch out for fees with secured credit cards. For instance, a secure card may have a cash advance interest as high as 27% of the money you take out (hence, it's advisable to avoid taking a cash advance out from a secure card.) You'll also likely pay a 3% fee (that's 3% of the total amount of cash you pay out.)
Additionally, late fees can be as high as $38 with secured credit cards. Consequently, make fees a focus when you're researching secured credit cards.
7. You Can Get a Higher Credit Limit With On-Time Payments
Secured credit card providers will reward customers who pay their bills on time.
For instance, a card provider might upgrade your credit line by $200 after you make after your first five or six months of on-time payments.
Moving from a Secured Card to a Regular Credit Card
It's entirely realistic to expect a "graduation" to a regular, unsecured credit card from a secured credit card.
That generally occurs after a sustained period of on-time card payments and staying well below your card's credit limit. By and large, expect that period to take about two years, give or take a few months, depending on the card issuer.
Being made eligible for a regular credit card may even happen without your requesting one. After a long period of credit-worthy card activity, your card provider may surprise you with an offer to an unsecured card.
If, after 18 to 24 months of regular, on-time secured card payments you feel like you've earned a battlefield promotion to a traditional credit card, go ahead and ask your card provider.
A phone call or online chat will suffice - you don't want to apply for a regular card and take a credit score hit for doing so. The card provider's customer service representative can likely give you a heads up on eligibility, or lay out a blueprint for you to graduate to a regular credit card.
Once you are approved for a regular, unsecured credit card, you can close out your secured card and any deposit money in your account will be returned to you.
There's really no great reason to hang on to a secured card when you've been approved for a regular credit card, although you can if you want to. Given the high interest rates, think twice about using a secured card if you've been approved for an unsecured credit card.
A Great Way to Build Credit
Secured credit cards are popular with consumers (especially younger ones) for a good reason.
Secured card cards allow consumers with no or low credit the opportunity to build a strong credit score, while still enjoying many of the advantages of a traditional credit card.
That said, we can't say this strongly enough - to get that good credit going, you have to pay your monthly bills on time and you have to use good judgment in using the card.
If you master those tasks, you'll be moving on up to a regular credit card before you know it.