Before you apply for a secured card, shop around. Keep in mind fees, interest rates and required security deposits.
When should you consider a secured credit card?
If you plan to apply for a school loan, buy a home or lease a car, it helps to have a positive credit history. But if you have bad or limited credit, you’re not completely out of luck. A secured credit card is one option that can help you build—or rebuild—your credit score.
What is a secured credit card?
Secured credit cards function a lot like traditional credit cards. The primary difference is that with a secured card, you pay a cash deposit upfront to guarantee your credit line.
While credit history may be used to determine eligibility for a secured card, the line of credit it offers requires a security deposit. This security deposit acts as a safeguard for banks to cover any purchases, should you miss payments. Making your monthly payments on time is just as crucial with a secured credit card as with a traditional card. Remember, if you default on your payments, the card issuer may keep your deposit.
A useful tool for rebuilding your credit
If you have bad credit, simply relying on cash, prepaid cards or debit cards to make your purchases will do nothing for your credit score because the activity doesn’t get reported to the major credit bureaus. When handled properly, using a secured credit card to help establish or rebuild your credit can demonstrate to your credit card issuer and to the credit reporting agencies that you are a responsible consumer who used credit wisely. To help build your credit—and to avoid interest charges—pay your balance in full every month, before the due date.
|Secured credit card||Unsecured credit card|
|Application required||secured credit card required||unsecured credit card required|
|Requires security deposit||secured credit card required|
|Interest may apply||secured credit card required||unsecured credit card required|
|Helps build credit||secured credit card required||unsecured credit card required|
|Lower credit limit||secured credit card required|
|May report to credit bureaus||secured credit card required||unsecured credit card required|
Who should consider a secured card?
If you have no credit history, a secured credit card can be a first step to begin building one. If you have a low credit score that makes it difficult to qualify for an unsecured credit card or other loan, a secured credit card can help you rebuild your credit.
How does a secured card work?
Secured cards are issued by most well-known credit card companies and banks. Similar to a credit card, you have to apply for a secured card. Once you’re approved, you can use your secured card for things like buying groceries or for booking a vacation—everyday expenses that you can repay immediately.
Five smart moves for using your secured card responsibly
Don’t charge excessively. Instead, purchase things you can pay off right away.
Set up payment alerts so that you don’t miss a payment. One late payment can hurt your credit.
Set up automatic monthly payments to help avoid late fees and interest charges.
Pay more than the monthly minimum amount owed. If you can, make more than one payment a month.
When will I qualify for an unsecured credit card?
If you use your card properly, your credit score should improve over time. Once your score has improved, you have several options. You can keep your secured credit card, close it out, or ask your issuer about upgrading to an unsecured card, which may be better for your credit score than opening a new account.
Now that you have an unsecured card and have successfully improved your credit, you may qualify for lower interest rates on mortgages, cars and other big-ticket purchases.