A secured credit card can provide a path toward a better credit history. (iStock)
Credit cards provide a revolving line of credit to borrowers—you can spend up to your credit limit, pay off the balance, then do it again.
Not all credit cards are created equal, though, and while some are available to people across the credit spectrum, others require good or even excellent credit to get approved.
Secured credit cards are specifically designed to help people with bad credit, limited credit history or no credit at all, and can help you build credit. Here’s what you need to know about secured credit cards, how to get one, their benefits and how they compare to other cards on the market.
What is a secured credit card, and how do you get one?
For the most part, secured credit cards function similarly to regular credit cards. The only difference is that you need to put up a security deposit to get approved. That deposit is typically equal to your credit limit—so if you want a $500 credit limit, your deposit will be $500.
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The card issuer uses this deposit as collateral and can use it to satisfy your debt if you stop making payments. In general, you’ll get the deposit back after you close your account and your balance is paid in full. Some secured card issuers, however, offer the chance to get upgraded to an unsecured card after a predetermined period of time.
Because secured credit cards are available to people with bad or limited credit histories, they’re best suited for people who want to work on improving their credit. Most major card issuers offer them, giving you plenty of options from which to choose.
What are the advantages of secured credit cards?
While the deposit requirement with secured credit cards isn’t ideal, there are several reasons to consider getting one:
- It helps establish credit: Most major card issuers report your account activity to the three major credit bureaus. So, if you’re relatively new to credit, just having the account can help establish your credit history.
- It can help you improve your credit score: As you use the card regularly, keep your balance relatively low and pay your bills on time, it can help increase your credit score.
- You may earn rewards: A handful of secured credit cards from national issuers offer rewards on everyday purchases. While getting cash back or points isn’t a top priority for people working to build credit, it can be a nice perk.
- Accessibility: Many credit cards are available only to a select group of people based on credit score, so you may not be eligible. With secured credit cards, however, your approval odds are relatively high even if your credit is in poor shape.
- No debt collectors: Again, the security deposit requirement isn’t exactly appealing. But if you do default on the debt, you won’t have to worry about debt collectors hounding you because the card issuer will simply use your deposit money to satisfy your debt.
How do secured credit cards compare with other credit cards?
The primary difference between secured credit cards and traditional unsecured credit cards is that the former requires an upfront deposit while the latter doesn’t. Also, unsecured credit cards are more likely to provide a rewards program and other perks.
As you work to build your credit with a secured credit card, you’ll be in a better position to qualify for an unsecured credit card in the future.HOW TO AVOID HAVING YOUR CREDIT CARDS CLOSED
Secured credit cards are also sometimes compared with prepaid debit cards, which aren’t credit cards at all.
Prepaid debit cards function similarly to a checking account, allowing you to use only the money you’ve loaded to your account. But unlike a secured card, you don’t get a line of credit and there’s no credit relationship, so prepaid debit card accounts aren’t reported to the credit bureaus.
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If you’re planning to get a secured credit card to build credit, here are some tips on how to use it effectively to improve your credit over the next year or two:
- Use the card regularly to establish an account history
- Keep your balance relatively low to show that you’re not relying too much on debt
- Pay your monthly bill on time every month
- Pay your balance in full to avoid interest charges