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Do you need to repair an ailing credit score? Alternatively, do you need to build a credit history so that you can even qualify for a three-digit FICO credit score? Applying for a secured credit card and making your monthly payments on time can help you reach either goal. You might even qualify for a secured credit card that automatically upgrades to a traditional card after you make enough on-time payments.
What is a secured credit card?
Secured credit cards work mostly like traditional cards: You use these cards to make purchases throughout the month, then pay off at least part of these purchases on or before your card’s due date. If you pay off your balance in full, you won’t owe any interest. If you pay off less than your full balance, your credit card provider will charge you interest on whatever’s left over.
With secured cards, though, you make an initial deposit with the bank providing the card. This deposit usually becomes your credit limit. When applying for a secured card, you might deposit $600 with your bank; your credit limit on that card is then $600, and you can’t run up charges totaling more than that amount.
This limits the amount you can spend, making it easier for people with damaged or limited credit histories to qualify for secured cards. Card providers are taking on less of a risk by establishing this limit; if you don’t pay your credit card bill, the bank can simply take the money it is owed from your deposit.
Because of this, secured cards are a good choice for consumers who have low credit scores or don’t have a long enough credit history to have generated a good credit score (or any score at all). As long as you make your monthly payments on your secured credit card on time, you’ll gradually build a strong credit history and a solid credit score. When your score is high enough, you can apply for traditional, unsecured credit cards.
Some secured credit cards automatically graduate to traditional cards after you make enough on-time monthly payments. The number of payments varies by card issuer, but many secured cards will graduate to unsecured versions if you make at least nine to 12 on-time payments in a row.
How do secured cards differ from unsecured credit cards?
You may be wondering, “What is an unsecured credit card?” The main difference between secured and unsecured credit cards is the deposit required by secured cards. Traditional, unsecured credit cards don’t require cardholders to make any deposits with their issuers.
The credit limits on unsecured cards aren’t connected to a deposit but are determined instead by the cardholder’s credit. Cardholders with higher credit scores will qualify for higher credit limits. It’s not unusual for consumers with the highest FICO credit scores — 740 or higher, typically — to qualify for credit limits of $20,000 or more with their unsecured credit cards.
Unsecured credit cards tend to come with more generous rewards programs, too. Many traditional credit cards allow cardholders to earn rewards points, free miles or cash back bonuses, while few secured cards offer rewards programs. This perk, along with higher credit limits, is why most consumers prefer unsecured credit cards.
Best secured cards that graduate to unsecured
Which secured cards automatically upgrade to unsecured? Here is a look at some of Bankrate’s top picks.
Discover it® Secured Credit Card
The Discover it Secured Credit Card is one of the few secured cards to come with a rewards program. You’ll earn 2 percent cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter. You’ll also earn an unlimited 1 percent cash back on all other purchases.
The card charges no annual fee and lets you open an account with a deposit of as little as $200. After seven months, Discover will review your payment history and credit behavior to determine if you can graduate to an unsecured Discover credit card.
BankAmericard® Secured Credit Card*
While it’s a fairly basic card, the BankAmericard Secured Credit Card does come with some nice perks. It doesn’t charge an annual fee, and you only need a $300 deposit to start an account. Additionally, you can deposit as much as $4,900 with this card — a high maximum deposit compared to other secured cards.
On its site, Bank of America says it will periodically review your account to determine if you can upgrade to an unsecured Bank of America credit card.
Capital One Platinum Secured Credit Card
You don’t need much money to start an account with the no-annual-fee Capital One Platinum Secured Credit Card. In fact, Capital One requires a deposit as low as $49. Just remember, your initial credit limit might also be low — more specifically, as low as $200. After six months, Capital One says it will start reviewing your payment and account history to see if you qualify for a higher credit limit or an unsecured Capital One credit card.
Citi® Secured Mastercard®
Though you’ll need a minimum deposit of $200 to qualify for the Citi Secured Mastercard, you do have flexibility. Depending on how much you deposit, you can qualify for a credit line of up to $2,500. Like other cards on this list, the Citi Secured Mastercard does not charge an annual fee. At 18 months of card ownership, Citi will review your account to determine if you qualify for a refund of your security deposit and can upgrade to an unsecured Citi credit card.
How to upgrade if your secured card doesn’t do it automatically
Some secured credit cards never upgrade to an unsecured version. In these cases, you’ll need to make the move to a traditional credit card on your own.
First, you’ll need to build a high enough credit score to qualify for a traditional card. You’ll typically need a FICO score of 680 or higher to qualify for traditional credit cards that also offer rewards programs. Fortunately, getting to this score isn’t complicated.
The most important step is to pay your bills on time. For example, paying your mortgage, credit card bills or student loans 30 days or more past due could cause your FICO credit score to drop by 100 points or more. Paying bills on time, on the other hand, can help your score steadily rise.
Make sure to keep your credit card debt low or nonexistent, as well. Having too much debt month to month can cause your credit score to drop. Always aim to pay off as much as you can by each due date, knowing it’s best to pay off your entire balance on or before your due date. Doing so will not only help your credit score but also ensure you won’t have to pay additional money in interest on your credit card debt.
Once your score is high enough, apply for a traditional credit card. Depending on your score and other factors, such as your monthly income, you might qualify for an unsecured card that comes with a higher credit limit and rewards program.
You’ll have to decide whether to close your secured card or keep the account open, but note that closing it could hurt your credit score. By closing an active credit card account, you’ll have less available credit — in turn, potentially increasing your credit utilization ratio.
This doesn’t mean that you should always keep your secured credit card account open. If you think you might be tempted to run up debt on the card and not pay it off in full, it might make more sense to close the account and remove the temptation.
How to increase your odds of qualifying for an unsecured credit card
The best way to qualify for an unsecured credit card is to practice good spending and bill-paying habits. If you pay your bills on time each month — including your secured card’s payment — you’ll steadily build a credit score or improve a weak one. You’ll also improve your credit score by paying off any existing debt.
How long it takes to build a credit score high enough to qualify for an unsecured card varies. If your score is low, it might take months of on-time payments to boost your score to the 680+ range that’s likely needed to qualify for an unsecured credit card.
The bottom line
Secured credit cards are a smart way to build your credit history so that you might qualify for an unsecured credit card in the future — one that comes with a higher credit limit and valuable rewards. The key is to make your monthly payments on time and to keep your debt low so that your secured card will one day graduate to an unsecured version.
*All information about the BankAmericard® Secured Credit Card has been collected independently by Bankrate and has not been reviewed or approved by the issuer.