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Beginner’s Guide to Secured Credit Cards

Posted by Daniel Azzoli on March 11, 2022
Person typing in secured credit card info into their phone.

If you’re thinking about applying for a credit card, there’s a good chance that your aim is to get your hands on an unsecured card. Whether you’re looking to earn cash back rewards, travel points, or you simply want to have access to credit for everyday purchases, an unsecured credit card is what most people have in their wallet.

The problem is that your credit score may play an important role when it comes to qualifying for one.  

So, what happens if you apply for one with bad credit, or no credit history in the first place? Generally speaking, there’s a chance that you’ll be seen as a risk to credit card companies, and your application may end up getting rejected.

If you find yourself in this type of situation, does this mean you’re completely out of options? Well, not exactly. If you’re looking to build your credit history, a secured credit card may be able to help!

Let’s take a look at what they are, the differences between a secured vs. unsecured credit card, and more.

What’s a Secured Credit Card?

A secured credit card can be used in the same way that you would use an unsecured card. Like an unsecured credit card, you’ll have a credit limit to draw from which you’ll then need to pay back by a certain date, otherwise interest will build up on the purchases you’ve made.

A computer screen with "secured" written on it

The main difference is that in order to qualify for one, you’ll need to provide a security deposit. The amount of money you put down as a deposit will typically become your credit limit. Because you’re providing a security deposit which a credit card issuer can seize in lieu of payment if you start to miss  your payments, it may be easier to qualify for one.

What is the Difference Between Secured and Unsecured Credit Cards?

In order to get a better sense of whether or not a secured credit card is right for you, it can be helpful to have a point of reference from which to better understand them. The obvious place to start is with the ways in which they differ from unsecured credit cards. Here are some of the key differences between the two.

1. Secured vs. Unsecured

Like we’ve mentioned, one of the main differences between secured vs. unsecured credit cards is that you need to provide a security deposit in order to get qualified for a secured card, whereas you don’t need to do that for an unsecured card. Instead, an unsecured credit card issuer may focus more on your credit score as well as a few other factors when determining whether or not to approve your application.

2. Potential Ease of Approval

Because you’re providing security deposit to get qualified for a secured credit card, they’re generally easier to get approved for, and in some cases, don’t have many additional requirements. On the other end of the spectrum, without a security deposit, a company offering you an unsecured credit card has no guarantee that you’ll repay what you’ve borrowed. Because they’re taking on greater risk, there may be more requirements to qualify, like a minimum credit score and income thresholds.

3. Rewards

One of the main benefits of unsecured credit cards is that many of them come with rewards of some sort. This could be things like cash back dollars or travel points that you can put towards flights and/or other travel expenses. A secured credit card won’t typically come with the best bonuses.

4. Credit Card Limits

Like we’ve mentioned, your credit limit on your secured card will be linked to the size of the security deposit you’ve put down. This means that you can essentially determine your credit limit. Having said that, there still may be minimum and maximum limits to the amount you set.

A phone, secured credit card, calculator, and pen on a blue table

Your credit limit on an unsecured card won’t be linked to a deposit, unlike a secured credit card. Your initial credit limit will be tied to your credit score and certain other factors. Having said that, you may be able to apply for increases to your credit limit over time. You may also receive offers for credit limit increases.

5. Initial Fees

In some cases, you may need to pay a setup fee in order to start using your secured credit card. This fee is not the same as the deposit you’ll need to provide. With an unsecured card, you generally won’t need to pay any sort of setup fee.

Potential Benefits of a Secured Credit Card

So, why would you apply for a secured credit card? How could it potentially help you? We have already gone over some of their possible benefits. For starters, because the card is secured, meaning you’ve provided collateral, there’s less risk involved from the end of the card issuer. This may make them easier to qualify for than unsecured credit cards.

Another potential benefit is that if you’re trying to build your credit history, they can be an accessible way to do that. In many cases, the payment activity on a secured credit card will be reported to a credit bureau, so if you always make your payments in a timely manner, you may be able to have a impact on your credit score.

How to Use a Secured Credit Card

While there can definitely be benefits to using a secured credit card, you can still get yourself into trouble if you don’t use it responsibly. In fact, if your aim is to start building credit with a secured card, doing things like missing payments can actually have the opposite effect. In order to avoid any potential pitfalls, keep these four things in mind.

1. Make At Least Your Minimum Payments

The biggest portion of your credit score is made up by your payment history. This means that the last thing you want to do is miss payments on any of your credit accounts.

Just like unsecured credit cards, your payments (as well as missed payments) on your secured card will likely be reported to a credit bureau. Because of this, you’ll want to make sure you’re making all your payments on time.

But what do you do if you look ahead at your next due date and don’t think you’ll have the money necessary to make your payment in full? In these instances, making your minimum payment will be enough to keep your account in good standing. While you’ll always want to make an effort to pay as much as you can to avoid accruing more interest, this may be a good way to avoid any negative marks against your credit history.

2. Be Aware of the Fees

Like we mentioned earlier, there may be fees that come with a secured credit card, specifically a setup fee. Whatever these fees may be, make sure that you’re aware of all of them. This can include things like late fees, annual fees, cash advance fees, and more. You don’t want to have any surprises coming your way!

3. Carry as Low of a Balance as Possible

With any type of revolving credit account, you’ll want to do your best to pay off the entirety of your balance every month. But if you find yourself in a situation where you’re not going to be able to do that, try to keep it as low as you possibly can. In fact, unless you’re paying off a purchase you’ve made on your secured credit card right away, you should try not to use more than 30 percent of your available credit[1]. This is because one of the things that can impact your credit score is how much debt you’re carrying, so you’re going to want to keep this number as low as you can.

4. Don’t Use Your Secured Credit Card When You Can’t Afford to Pay it Off

This is an extremely important tip for using credit in general. In most cases, if you don’t have the money to pay back what you owe, or at least have a clear plan to pay it off, you should try to avoid taking on debt in the first place. When it comes to your secured credit card, try to only make small purchases with it that you can pay back right away.

Person looking at secured credit card contract

How Can I Apply for a Secured Credit Card?

The process of applying for a secured credit card is much the same as it is for an unsecured card. Many banks and mainstream credit card issuers may offer secured cards. If your application for one is approved, you can use your card just as you would use a regular card.

Consider Your Options Before Applying for Credit

If you’re having a hard time accessing credit and you want an opportunity to build your credit history, a secured credit card may be able to help you. In order for this to be the case, you’ll need to make sure that the payments you make on the card you’re applying for are going to be reported to a credit bureau.

Just remember that before you apply for an online loan or a loan of any type, make sure to thoroughly assess your financial situation, do research on different credit options, and find something that works for you. And never apply for credit that you won’t be able to afford!


[1] https://www.experian.com/blogs/ask-experian/credit-education/score-basics/credit-utilization-rate/

 

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see MoneyKey's Terms of Use.

Posted in: Financial Tips

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