Is a Secured Credit Card Right For You?

Do one thing: If you want to build a thin credit file, talk to your bank or credit union about secured card options.

If you want to open a credit card but either don’t have a credit history or have a credit score you aren’t super proud of, you’re not out of luck. Seriously, even if you’ve got a bankruptcy in your not-so-distant past, you can still put a piece of plastic in your wallet.

Secured vs. Unsecured Credit Cards

What’s the fix? A secured credit card. Never heard of it? Let us break it down for you. Most credit cards — whether they’re reward cards, cash-back cards, store cards, or just plain Visas and Mastercards — are actually unsecured credit cards. This means the bank has no security or collateral, which ensures you are going to pay back the money you’re racking up by swiping.

Breaking Down Secured Cards

Secured credit cards ask you to put a little skin (again, collateral) in the game.

• Security Deposit. They require you to pay a security deposit to the financial institution when opening the card. Thus, the bank doesn’t risk as much in approving you because if you don’t pay your bills, the bank will close your card and keep the security deposit. In other words, just like the lender has something they can take from you if you don’t pay your mortgage (your house) or your auto loan (your car), they have some of your cash they can use to repay themselves.
• How Much Security Deposit? The security deposit doesn’t have to be large. The typical minimum security deposit is around $200. Whatever amount you decide to shell out to the bank will match your spending limit on the card.

• Functionality. Aside from the initial security deposit, secured credit cards work much the same way as unsecured credit cards. You spend money, you pay bills. Wash, rinse, repeat.

• Credit Bureau Reporting. Most secured credit cards report activity to the three credit bureaus. That means they can help you build or rebuild credit when you use them responsibly. Here’s how it usually works:
  • Keeping balances low helps your credit utilization
  • Your activity (on-time payments, balance, and credit limit) is reported just like a regular credit card
  • Making payments on time can help improve your credit history

Quick Tip: While most secured card issuers report your card activity to all three credit bureaus, there may be some that do not. Ask before you apply. If a particular card doesn’t report to one or more of the bureaus, you won’t build (or rebuild) your history with those bureaus.

Who Secured Cards are For

Secured cards aren’t for everyone. Here’s how to know if it’ll work for you.

• New to Credit. A secured card may be best for people trying to establish credit for the first time, like college students, or anyone with a thin credit file.
• Credit Rebuilders. Those looking to rebuild their credit after challenges like default or bankruptcy, a secured card can help you get back on track.
• Limited Options. There may also be advantages to using a secured card in some cases if you’ve been turned down for traditional cards.

The Goal of Secured Cards

The ultimate goal is to graduate to an unsecured credit card.

• Build your credit until your score reaches above the mid-600 level
• Talk to your current secured credit card issuer about the unsecured credit cards they offer
• See if you qualify for unsecured cards.

In some cases, your card company can convert you to a regular credit card without you even having to ask. But ask them when you think you’re ready.

With Rebecca Cohen