A secured credit card is one of the best ways to either establish or rebuild your credit. If you're new to credit, a secured card allows you to build your credit in a fairly safe way. You make a security deposit in an account and that "secures" the card. This is required to minimize the bank's risk. If you don't pay your credit card bill, the bank will use your deposit to cover the cost.
If you've had some rough credit times and you now have bad credit, then a secured credit card can help you rebuild your history and help you rise back up into the ranks of consumers with good credit. Of course, this assumes you're using the card responsibly.
Let's take a look at how a secured card works and how it helps you with your credit score and history.
How a Secured Credit Card Works
Some folks have a misconception that the funds in the bank account are used to pay the credit card bill. This is not true. Your deposit stays in the bank account. You'll get a secured credit card and you'll use this card to make purchases. When the bill comes, you pay your bill from a different bank account. The deposit stays put, so you are truly buying things on credit. The card isn't stamped with a "Secured!" label so there's no stigma attached to it.
Your deposit amount is, in most cases, your credit limit. However, there are some secured credit cards that are "partially secured." For example, you might only be required to pay a $49 deposit, but receive a $200 credit limit. Most secured credit cards offer a way to increase your credit limit by increasing your deposit. Each issuer will have their own policies, so you'll have to read the fine print to understand how to increase your deposit amount and, thus, increase your credit limit.
What to Look for in a Secured Credit Card
When choosing a secured card, make sure that the issuer reports your payment history to the three major credit bureaus. This is essential because this is how you improve your credit score and build a solid history. In general, it takes about 12 to 18 months of responsible use to establish a better credit score. Of course, this depends on the details of your situation and any negative items on your credit reports.
Responsible use means you've paid your bill on time and kept a low balance during the month. Ideally, you want to pay your bill in full every month. Carrying a balance is expensive and it can lead to credit card debt.
You absolutely must read the fine print carefully because there are some secured cards out there with high interest rates and even monthly fees. You want to zero in on the best card you can qualify for.
Where to Apply for Secured Credit Cards
Several major banks and financial institutions, such as Capital One, Wells Fargo, Citi, and Discover offer good secured credit cards. You can do some research on credit card comparison websites, including right here on LendingTree. Another good place to look for a secured credit card is a bank or a credit union where you have an account. They might be more willing to take a chance on you.
Keep in mind that it's possible to be turned down for a secured card from a major bank, especially if you've had a recent bankruptcy. But there are a few secured card issuers, such as First Progress, that are easier to qualify for.
Moving Up to an Unsecured Credit Card
After a year to 18 months, your secured card issuer might "promote" you to an unsecured credit card. Some issuers will state this outright on the card's homepage. But some card issuers make no promises about this. If you've used your card responsibly, though, you might be able to qualify for an unsecured credit card that targets fair credit. Capital One and Barclaycard offer good choices in that category.
The important thing is to be patient. Make sure your score is high enough to apply for an unsecured credit card. Every time you apply for a card, your score goes down, on average, two to five points. A good way to keep tabs on your credit progress is to check your free credit score on LendingTree. That way, you'll have a good idea of when you're ready to apply for an unsecured credit card.