Qualifying for credit often requires you to have good credit. This catch-22 can make it difficult when you are trying to get a credit card and have poor credit or minimal credit history. In fact, there are an estimated 121 million people in the U.S. with poor or thin credit, according to the Financial Health Network.
Why Secured Cards Can Be a Good Option
When you have a less-than-perfect credit score or limited credit history, you will have an easier time qualifying for a secured credit card than for an unsecured credit card. This is because secured credit cards equal lower risk to the card issuer, due to the security deposit you put down.
Secured credit cards give you the opportunity to build credit¹. They also serve as a stepping-stone to unsecured credit cards or other credit products, such as auto loans, personal loans and mortgages.
How Do Secured Cards Work?
A secured credit card works like any other credit card, except you need to make a deposit for collateral. This is basically insurance for the lender in case you default on the credit card. The deposit is usually between $200 and $2,000. It often serves as the amount of your credit line. For example, if you make a $500 deposit, then your credit line is $500. Once you pay the deposit on the secured card, you can use the card just like you would any other credit card. Secured cards are accepted at any places credit cards are accepted. You can use a secured card for groceries, travel, gas, online shopping — pretty much anything!
You pay off a secured card just like you would any other card. If you don’t pay your balance in full each month prior to the due date, you will incur interest on any balance you carry.
Do Secured Credit Cards Affect Your Credit Score?¹
Tips for Using a Secured Credit Card
Since the primary goal of secured credit cards is to help build credit¹, you want to make sure that you use it responsibly. The best way to do this is to:
Source: Financial Health Network – https://finhealthnetwork.org/
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- Pay your bill on time
Payment history is the most important factor in determining your credit score. Even if you can’t pay the full balance, always make sure to pay the minimum amount before your due date!
- Keep your credit utilization ratio below 30 percent
Credit utilization is the amount of credit that you use (i.e., your credit card balance) compared to your total credit limit. The lower you keep this, the better for your credit score. It is good to aim for keeping this under 30 percent for the best impact on your credit score.
- Don’t max out your card
Maxing out your credit card will increase your credit utilization, while also making it more likely that you’ll carry a balance.
- Try to always pay your balance off in full
Secured credit cards aren’t known for having the lowest APRs. That’s just not what they’re designed for. So, if you end up carrying a large balance from month-to-month, you’ll end up paying hefty interest fees.
- Confirm that the issuer reports to the three major credit bureaus
Like we mentioned, secured cards can be a great way to build your credit¹, but to make sure that this happens, you’ll want to confirm with the issuer that they report to the three major credit bureaus – Experian, Equifax and Transunion.