A secured credit card can provide you with an opportunity to build your credit history from scratch, or rebuild your credit after its taken a hit. But with so many options to choose from, it’s easy to get overwhelmed.
Keep in mind, the primary purpose of a secured credit card is to help you improve your credit history to the point where you can qualify for better card options. So you don’t necessarily need to focus on the long-term value you can get from the card.
It is important to consider the card’s benefits to make sure you get the best experience and that your efforts actually help build your credit history. Here are seven things to look for when choosing a secured credit card.
1. Credit reporting
In most cases, credit card companies report your account activity, such as your balance and payment history, to the three major credit bureaus: Experian, Equifax and TransUnion. If you get a secured credit card from a major card issuer—the Capital One Platinum Secured Credit Card or the Citi® Secured Mastercard®, for example—this feature is standard.
However, if you’re getting a secured credit card from a lesser-known card issuer, it’s possible your activity will only be reported to one or two of the credit bureaus. The problem with that is your credit score is generated using information from the credit bureaus. If you get a secured card with a bank that only reports to Experian and you apply for a loan with a lender that checks your Equifax and TransUnion credit reports, for example, it’ll be as if all of your hard work never happened.
It’s easy to find a secured credit card that doesn’t charge an annual fee, especially if you’re going with a major card issuer. But there are secured cards that do charge an annual fee.
In some cases, these cards may make up for it by offering a lower interest rate. For example, the First Progress Platinum Prestige Mastercard® Secured Credit Card charges a $49 annual fee but comes with an impressive 12.24 percent variable APR.
But if you find a card that charges an annual fee and doesn’t give you anything of value in return, it’s probably not worth it.
In an ideal world, you wouldn’t need to worry about a credit card’s interest rate. If you can pay your bill on time and in full every month, you can avoid interest charges entirely. But if your financial situation makes it challenging to do that, try to get as low an APR as possible.
Note that there are some unsecured credit cards out there you can get with bad credit, but you’ll want to watch out for exorbitant fees that can exceed the cost of a deposit. Some of these cards charge an upfront processing fee just to open the account and monthly fees on top of their annual fees. In some cases, the interest rate can be upwards of 30 percent, which is unheard of among top secured cards. It’s best to avoid these cards.
3. Grace period
A credit card grace period is the span between your statement date and your due date. During this time, you won’t pay any interest as long as you pay your statement balance from the previous month in full.
If a credit card doesn’t offer a grace period—and not all do—your purchases start accruing interest from the date of the transaction. With no grace period, a secured credit card can get expensive fast, so getting a card that has one should be a top priority.
Fortunately, most of the top secured credit cards offer a grace period. But even with one, it’s important to set up automatic payments on your account as soon as it opens, so you don’t accidentally miss a payment and get hit with interest and a late payment fee.
4. Security deposit affordability
One of the biggest drawbacks of a secured credit card is the deposit requirement. Most people who are new to credit or have poor credit don’t have lots of excess cash they can lock up with a credit card for several months.
As a result, it’s important to choose a secured credit card based on the affordability of the deposit. In many cases, you can find a card with a minimum deposit of $200 or $300, with your credit limit equal to your deposit amount. The Capital One Platinum Secured Credit Card is an exception, offering an initial $200 limit for a deposit as low as $49, depending on your creditworthiness.
As you compare deposit requirements, it’s important to remember a lower credit limit typically makes it harder to maintain a good credit utilization ratio, or the percentage of your available credit that you’re using at any given time. As you work to build credit, it’s best to keep this rate as low as possible.
5. Upgrade options
Historically, you couldn’t get your deposit back on a secured credit card unless you close your account. But there are a few card issuers willing to upgrade your account to an unsecured card after a while.
With the Discover it® Secured, for instance, you can “graduate” to an unsecured account and get your deposit back as soon as seven months if you use your card responsibly and pay on time. The Capital One Quicksilver Secured Cash Rewards Credit Card is another example, though the card issuer doesn’t disclose when an upgrade is possible.
Having a secured card that can be converted to an unsecured credit card is important because it gives you the ability to keep the account open, even after you’ve outgrown it. Keeping old credit card accounts open can help build your credit, especially if your payment history on the account is positive.
6. Eligibility requirements
On the surface, it might seem like secured credit cards should guarantee approval. After all, you’re typically securing the entire credit line with cash that the card issuer can keep if you default.
But card issuers may still deny your application if your income or credit history doesn’t meet its requirements. For example, Capital One won’t approve your application if you’re past due on another Capital One account.
Also, you generally can’t get any credit card if your credit report reveals a bankruptcy that hasn’t been discharged. Some card issuers may even have a waiting period after the discharge date.
As you compare your options, check to see if each card issuer has a pre-approval process that can give you an idea of your approval odds. Also, read the fine print or consider calling the card issuer to learn about potential disqualifiers and whether they apply to you.
If your credit situation is in dire straits, the OpenSky® Secured Visa® Credit Card could be a solid choice because it doesn’t require a credit check to apply.
7. Card benefits
The ultimate goal with a secured credit card is to build or rebuild credit, but it doesn’t hurt if the card you’re using also offers rewards and perks along the way.
For example, the Capital One Quicksilver Secured Cash Rewards Credit Cards offers 1.5 percent cash back on every purchase you make, a rate that rivals some of the best cash back credit cards on the market. What’s more, the card has no annual fee and gives you the chance to get your deposit back without closing the account.
Similarly, the Discover it Secured card offers 2 percent cash back on up to $1,000 spent in combined purchases quarterly at gas stations and restaurants and 1 percent back on everything else. Additionally, Discover will match all the cash back you earn during your first year on your account anniversary. The card has no annual fee.
Again, it can be easy to get distracted from your goal by bells and whistles, but if you’re disciplined and don’t let the promise of rewards lead to overspending, it can feel like icing on the cake.
The bottom line
If you’re looking for a secured credit card to build or rebuild your credit history, avoid the urge to accept the first offer you see. Instead, take your time to research your options and compare card features to determine the right fit for you.
While you likely won’t use your secured credit card forever, a good one can make your life a little easier and even offer added value while you work to build your credit.