An internet search for â€śsecured credit card” generates many results, but not all secured credit cards are created equal. Here’s a simple checklist to help you find a secured credit card that’s right for your needs based on your financial past, and future goals.
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Find a Secured Credit Card by its Features
Most secured credit cards require that you put forth a security deposit that essentially acts as a form of collateral to secure the credit line. Some creditors will calculate your credit line based on a percentage of that deposit (allowing you to spend more than you’ve paid in the deposit); others will extend the credit line equal to your deposit.
Assuming you maintain the terms of your cardholder agreement, the money will be returned to you when you no longer have the card. If you fail to make payments, the creditor can keep the money you’ve deposited, and apply it to what you owe. (And report your delinquency to credit bureaus, and possibly pursue any balance due beyond the security deposit.)
But the similarities usually stop there between secured credit cards. What else do you need to compare to find a secured credit card that works for you?
- Credit limit: What dollar amount are you able to submit for your deposit and will that become your credit limit?
- Annual fee: Does the card charge an annual fee?
- Interest rates: What interest rates apply to the card and how high are they?
- Late payment fees: What are you charged if you are late on a payment?
- Grace period: The amount of time before interest rates apply to the balance you owe.
- Can you “graduate” to an unsecured card? If so, does the creditor begin evaluating your account after a certain amount of time with responsible habits?
- Does the card offer any additional benefits, such as cash back rewards or other features and benefits?
Because applying for credit cards and other loan products generates a â€śhard inquiry” that will be included in your credit report for up to at least two years, it’s important that you pursue only the secured credit cards that suit your shorter and longer term needs.
Know When a Secured Credit Card Can Help You
Consider the scenario that best fits your life to guide you in finding the right card for you.
- You’ve never had a credit card and want to build your credit. Credit history (both positive and negative) is established based on the account activity that creditors report to the credit bureaus. Apply only for secured credit cards that report activity to the major national credit bureaus regularly. Also, find out more about what criteria the creditor uses to evaluate when you’re eligible to â€śgraduate” to an unsecured credit card once you’ve demonstrated responsible use, and whether your deposit to secure the credit line will be returned to you.
- You’ve had issues managing credit and want to rebuild your credit. Secured credit cards may have lower credit lines than unsecured credit cards. Though a lower credit line can prevent you from overcharging what you’re able to repay, it requires discipline to ensure your credit use is helping, not hindering, your credit score. That’s because debt utilization ratio (the amount of your available credit lines that are in use at any given time) is an important consideration in your credit score. Secured credit cardholders will want to keep an eye on how much they charge each month and how close it comes to the overall credit limit.
- You’ve had a bankruptcy. Applying for a secured card and having money to deposit towards the credit line doesn’t guarantee approval. For example, some creditors do not allow applications by someone with an unresolved bankruptcy. And keep in mind that creditors are considering your ability to repay in tandem with your deposit and credit history.
Build or Rebuild Your Credit with Discover it® Secured Card.
Save for Your New Secured Credit Card
Once you’ve found a secured credit card you’re interested in, create a plan to save up for the required deposit. If you put forth $700 to secure a credit line, for example, but struggle to pay the rest of your bills as a result, you’ll risk negatively impacting your credit, instead of improving it.
Ultimately, the key to establishing a positive credit history with a secured credit card isn’t about the logo on the card, or the rewards benefits the card offers. It’s about managing how much credit you use each month, paying your bills on time and, ideally, avoiding interest rate charges on your balance so you’re not paying for credit unnecessarily.