Not everyone can qualify for premium credit cards that offer rich rewards, high limits, or extremely low interest rates. If you have been refused due to bad credit or no credit, a secure credit card is probably your best option. These cards require a security deposit, which makes them easier to obtain.
To understand what is important when choosing a secured credit card, keep in mind what a secured card is for: creating credit. Don’t expect to finance a world tour or a big screen TV with a secure card. Plan to use it for small purchases and pay for them every month. The goal is to improve your credit so that you can benefit from better cards later.
A secure card might be your first card, but hopefully it won’t be your last. You won’t get everything you want, but you should get what you need. Here are five things to look for when choosing a secure card – and two things not to worry about.
1. Credit bureaus reports
If you are trying to improve your credit, the payments you make should be reported to the credit bureaus, the companies that compile credit reports used for credit reporting. There are three major credit bureaus: TransUnion, Experian, and Equifax. Ideally, the card you get will report your account activity to all three (most cards do), but two is better than none.
A credit card that does not report account activity to the credit bureaus is not a card worth holding. It is the only dealbreaker if you want to increase your credit.
Nerdy tip: Don’t be fooled by a credit card that says “no credit check”. A credit check is different from a credit report. During a credit check, the credit card company examines your credit history as part of the application process. Credit reports occur after obtaining the card when the company sends information about your account to the credit bureaus. Even a card that doesn’t require credit Check should still make credit report.
2. A deposit you can afford
The security deposit is what makes a secured credit card an option for people with bad credit or no credit. You pay a sum of money when you open the account, and the card issuer holds that money as collateral. Your credit limit is usually equal to your security deposit, so you cannot charge more to the card than what you have deposited. When you upgrade your account or close it in good standing, you get your deposit back.
Most secure cards require a minimum deposit of $ 200 or $ 300. You can deposit more money to get a higher limit. To get the most from your credit score, it’s usually a good idea to keep your balance below 30% of your limit. Staying below 10% is even better, so depositing above the minimum can give you a bit more leeway. If you have extra money available, the maximum deposit amount may be as much of a consideration as the minimum when choosing a secure card. And, if you don’t, consider save for a secure deposit by credit card.
Some secured credit cards require you to make your deposit immediately upon approval, while others give you a little time to collect the money. Not funding the deposit on time may result in transferring the status of your approval request to rejected, so having the cash on hand when you apply is your best bet.
3. Reasonable costs
A lot of best secured credit cards do not charge an annual fee. If you have to pay a fee, you should get something for it, like a lower interest rate or the ability to qualify without a credit check. Typically, the annual fee on the secure card you choose should not exceed $ 50.
With a good secure card, annual fees should be the only inevitable fees. Do not opt for cards that charge a fee to be applied or for “processing” before opening your account. Some cards have a monthly “maintenance” fee or additional charge each time you use your card or pay your bill online. These cards are not designed to help you increase your credit; they are designed to bleed you dry. Just because you have bad credit doesn’t mean you deserve a bad credit card.
If you use your card responsibly, you shouldn’t pay late or receive cash advances, which usually incur fees.
4. A path to upgrade
A secured credit card shouldn’t be a long-term proposition. Use it to increase your credit, then get a better card.
Some of the best secured credit cards come from issuers who also offer products for good or great credit. When you’ve improved your credit enough, you can improve your account to an unsecured card and get your deposit back. Upgrading allows you to keep your same account but with a new card attached. This can improve your credit because the age of your accounts is a factor in your credit rating.
Some credit card companies have an automatic upgrade process. the Discover it® secure credit card, for example, begins reviewing your account after eight months for a possible upgrade to an unsecured Discover card. With other card issuers, however, it’s up to you to request an upgrade. the upgrade eligibility rules may be vague, so keep an eye on your credit score. And don’t be afraid to call customer service and ask if you’re on the right track.
Finally, some secure cards come from issuers specializing in consumers whose credit is less than good. As a result, they might not have good unsecured products for your upgrade. With these issuers, you will need to close your account to get your deposit back or leave it open for a while and view it as an investment in your credit score. The lack of an upgrade option doesn’t mean you should never choose a secured credit card from this issuer. You’ll just need to understand that your leveling path will take you somewhere else.
5. A grace period
Grace periods are standard on most credit cards, but sometimes cards for people with bad credit don’t have them. Make sure yours does.
Obvious question: what is a grace period?
If you carry over your credit card balance from month to month, that is, if you do not pay the full balance shown on your statement, you will be charged interest on all purchases as soon as possible. ‘they will reach your statement. However, if you pay your statement balance in full, no interest will be charged on new purchases before your next statement due date. This interest-free period is the grace period.
Put simply, if you pay off your credit card balance in full and on time each month, you shouldn’t have to pay interest on your credit card. It is important to have a grace period because the interest rates on secured credit cards are usually high.
Two things you shouldn’t worry about
When choosing a secured credit card to build or rebuild your short term credit, you have different needs than someone with great credit looking for a card to use for the long term. Two of the most important considerations for people with excellent credit are the card’s current interest rate and the rewards earned by the card. Here’s why these factors aren’t as critical with secure cards.
Interest rates, or APRs, for secured credit cards are often well over 20%. But if you use the card as directed – making small purchases and paying them off in full each month – your grace period will be in effect and your APR will not be relevant. Again, a secured card is a tool for creating credit, not for getting into debt. If you plan to have a balance each month, it may be worth considering why you want a secure card. Spending more than you can afford is not a recipe for rebuilding credit.
Nonetheless, there are secure cards that offer extremely low interest rates, but be prepared to pay an annual fee for them.
Some secure credit cards offer rewards. Getting a little something back for your expenses is better than nothing, but it’s unlikely to amount to much considering the low credit limits of secured cards and the value of the credit score tied to use. a small percentage of your limit.
Suppose you have a secure card with a $ 300 limit that pays 1% cash back on your spending. Keeping your balance below 30% of your limit means spending no more than $ 90 per month. That’s 90 cents in rewards. Do this for a year, and it’s only $ 10.80. It’s real money, sure, but you don’t miss out on a big deal when you have a secure card with no rewards.
Getting a secure credit card and using it responsibly is one of the fastest and easiest ways to build credit. But the secure card you choose should help you get better credit, not be a hindrance.