Need To Build Credit? Consider a Secured Card

If you’re trying to build (or re-build) credit, a secured credit card can be a helpful tool.  A secured card works a lot like a traditional credit card:  With a secured card, you pay a security deposit and have access to a line of credit that you can use to make purchases.   You make payments, and, if you carry a balance from month to month, you are charged interest.   Secured cards can help your credit score, and responsible use can make it easier for you to obtain a traditional, unsecured credit card down the road.

Secured cards aren’t for everyone – but if you’re struggling with no credit, or less-than-perfect credit, a secured card may be a good option.  Before you apply for one, though, it’s a good idea to weigh the pros and cons first.

Secured Cards: The Pros

As I’ve already mentioned, there are several unique benefits to secured cards – especially if you’ve had trouble getting approved for a traditional card.  A few of the benefits include:

• They help you build credit.   Most secured credit card lenders report to the major credit bureaus, which means that if you use your secured card responsibly (as in, pay your balance off in full each month, make your payments on time, don’t miss payments), your credit report will reflect that responsible use.  

Note that I said most secured card lenders report to the major credit bureaus.  There are a few lenders out there that don’t report secured card activity, so make sure you ask before you apply for a card.

• They’re easy to get, even if your credit isn’t perfect.   Ever tried to apply for a credit card with bad – or nonexistent – credit?  It’s not easy.   Secured cards are much easier to get, even if your credit history isn’t great.  That’s because, unlike traditional lenders, secured card lenders require you to put down a cash deposit before you obtain a line of credit.  That deposit – which can be anywhere from $200 to upwards of $1,000 — serves as collateral.  If you don’t pay your credit card bill, the lender keeps your deposit.  In other words, if can put up the money for a deposit, you can probably get a secured credit card.  

Another plus?  The money you put down as collateral typically sits in a savings account and earns interest. 

• They provide a pathway to a traditional, unsecured card.  Some secured credit card lenders will give you the option to transition from a secured to an unsecured credit card after you’ve established a solid track record of responsible use (this typically happens after about a year). 

The specifics vary from lender to lender – some cards automatically switch after a set time period, while others require you to request the transition (this is another question you should ask before you apply for a secured card).  Either way, it’s a good way to continue building or rebuilding your credit.

Secured Cards:  The Cons

Secured credit cards can be very useful – and they offer a lot of benefits for people with credit issues.  But they do have a few drawbacks, too.  Here are a few things to consider before you run out and apply for a secured card:

• They come with higher fees.  Because secured cards are typically marketed to “high-risk” customers, the fees and interest rates associated with these cards tend to be higher.  It’s not unusual to find secured cards with interest rates between 20 and 30 percent (which is a good reason to make sure that you never carry a balance!).  In addition, many secured card lenders charge additional fees, such as application or activation fees. 

• They come with lower credit limits.  Most secured credit cards have credit limits of a few hundred or a few thousand dollars, depending on the amount of your deposit.  Keep in mind, though, that the best way to use a secured credit card is to buy a couple of items every month and pay your balance in full.  Carrying a balance from month to month is a bad habit to get into – and it’s not even necessary in order to build credit.   In fact, having a zero balance will be good for your credit score (when factoring your credit score, low credit utilization is seen as a positive – so the more available or unused credit you have, the better).

• They are popular with scammers.  Again, because they are typically aimed at folks with bad or no credit, secured cards have become especially popular with scammers looking to make a quick buck.  Although scams can vary a bit, most of them work by trying to get you to send a deposit as collateral for a secured card.  Of course, if you send a check, chances are you’ll be out a few hundred bucks and you’ll never receive your secured card.

These phony offers often arrive by mail, and some scammers even use the name and/or logo of a reputable lender to make them seem more legit. 

The Verdict

Secured credit cards are great options for people who need to rebuild or establish credit.  They’re easier to get than regular cards – and many of them can eventually transition from secured to unsecured. 

If you’re looking for a way to build or re-build your credit history, a secured card might be right for you.  While secured cards can be a bit heavy on fees, they can be a good choice if you aren’t able to get a traditional, unsecured card.   Just remember to do a fair amount of research before you commit to a card – and remember to use every card (secured and unsecured) responsibly!