One of the fastest ways to build up your credit is to use a credit card.
However, if you have little or no credit history, flat-out bad credit, or if you have a poor credit rating, it can be difficult to qualify for an unsecured credit card (unsecured means you don’t have to have any money put away as insurance, or collateral, for any purchases you make — it’s what most credit cards are).
Creditors have stepped up their lending standards, and you might not have such an easy time getting a credit card that isn’t secured by some type of asset.
This is where secured credit cards can come in handy.
Secured credit cards are tied to a deposit account, so an issuer feels more comfortable about letting you use a credit card (you put away money to be used by the secured credit card issuer in case you don’t pay your bill). The deposit account is usually something like a savings account or a certificate of deposit (CD). Your payment history on a secured credit card is reported to the major credit bureaus, so if you are responsible, you will see an improvement in your credit. As your credit improves, you can shift to an unsecured card with a lower interest rate, more benefits, and get your “security” back.
If you need to build your credit, make sure you consider among the best secured credit cards to make sure you have a tool that will best help you move to an unsecured card.
How Do I Choose a Secured Credit Card?
The most important thing to remember when choosing a secured credit card is that you shouldn’t mix it up with a prepaid debit card.
It can be easy to mix them up, since both have the well-known credit card logos, and you have to make some sort of deposit in order to use them. A prepaid debit card will not report your payment behavior to the three major credit bureaus. This means that it will do nothing to help you build good credit.
The very first question you should ask about a secured credit card is whether your payment history will be reported; next, you should find out how often it will be reported. Ideally, the issuer will report every 30 days.
Other considerations when choosing a secured credit card include:
- FDIC protected deposit: Make sure that the issuing bank is FDIC insured. You want your security deposit protected from loss in the event of a bank failure.
- Interest rate on deposit account: Since you are making a deposit into a savings account to serve as collateral, you should find out what your return will be. Citi offers fairly competitive yields on its savings account. However, realize that the interest rate will most likely be on par with what you would earn at any brick and mortar bank. Take into consideration any benefits you might receive in lieu of interest on your deposit.
- How long it will take to qualify for an unsecured card: You should find out how long it takes to qualify for an unsecured credit card. Most cards will require at least nine months, and many won’t let you switch until you have been responsible for at least a year.
- Fees and other charges: Many secured credit cards require set-up fees, and may also charge monthly fees or annual fees. Find out what sorts of fees the card charges, and when you will have to pay them.
- Minimum deposit: Ask about the minimum deposit, and what sort of credit line it will result in. Many cards will give you a credit line equal to the amount in your savings account. Find out, too, what happens if you withdraw money from your savings account, since that can impact your credit line, or result in fees.
Here are some great options in some of the best secured credit card offers:
Additionally, there is no set-up fee, as you might see with some secured credit cards. You can deposit between $500 and $5,000 in an Applied Bank savings account to get started. Your credit limit corresponds to how much money you deposit. There are also timely credit bureau reports.
Of course, the Platinum Zero Secured Visa has to make up for this generosity somehow. Because of the generous 0% APR, you will not be earning interest on the collateral you deposit. The card comes with a monthly fee of $9.95. That adds up to $119.40 per year. Additionally, there is a 9.99% variable rate on cash advances from this card. You should avoid getting a cash advance at all costs, if you can (this is a general rule for any credit card).
Like the Platinum Zero card, the Secured Visa Gold card won’t charge you a higher rate if you are late making your payments (but you may be charged a late-payment fee). However, it’s important to pay on time, since Applied Bank will make regular reports to the major credit bureaus (remember, the quicker you increase your credit, the quicker you can switch to an unsecured card).
You should be aware, though, that the Secured Visa Gold credit card does not offer a grace period for purchases. Instead, you will start accruing interest on your purchases the day after you make them. This makes timely payment of the card vital. [Seriously. When you make a purchase, go and pay it off ASAP. This will also help your credit.] The longer you wait to pay on the credit card, the more you will pay in interest. You will also not earn interest on the money you deposit with Applied Bank.
There is an annual fee of $35 for this card and no application fees.
The APR is currently 9.9% and varies with the Prime Rate. There is no penalty APR
When you start your application USAA will ask you some eligibility questions. This is because USAA is primarily for those in the military and veterans. If you aren’t eligible as a military member you may still be eligible for their credit cards.
Because this is an American Express card you also get benefits from them such as emergency assistance, roadside assistance, and concierge service. You also have liability coverage if you card is lost or stolen. Check with the card for specific terms and restrictions.
The Capital One Secured MasterCard comes with a $29 annual fee. However, this rather low annual fee is offset by a fairly steep interest rate of 22.9%. Additionally, Capital One offers you the opportunity to enroll, for free, in the CreditInform program to help you track your credit information and get access to credit tools.
There’s no credit check to get the card and as such, no minimum credit score is needed (you are trying to build up your credit after all). Not though that there isn’t a grace period for this card. Pay off your card ASASP or you accrue interest charges. This is a great incentive to make sure you pay off your card fast which is what you want to do to build up credit.
There’s a fixed APR of 9.99% that won’t go up even if you pay late. Just understand that you will still be charged late fees.
Since this is a Visa® card it is accepted at millions of locations. You also get the benefits of having your activity reported to the credit bureaus (this is good so long as you pay on time).
There is an annual fee of $50 which is charged to you when you open your account (so your initial credit limit is your deposit minus $50).
To Sum Up
A secured credit card can be an excellent tool in building, or re-building, your credit. However, you need to use it carefully.
Additionally, you should do what you can to show responsible credit behaviors, since secured credit cards come with more restrictions, and are costlier, than unsecured cards.
And remember, when you use secured credit cards for bad credit you want to be on your best credit behavior!
Your goal should be to move on to an unsecured credit card as soon as possible.