When it comes to getting a credit card, it can be overwhelming – especially when you have less than stellar credit.
For starters, it’s hard to decipher the web of credit card features, fees, and interest rates. And, things can get even more confusing when you throw the term “secured” credit card into the ring.
You might want to know, “What is a secured credit card”? Or, how does a secured credit card work?
If that’s the case, this guide is here to answer your questions about secured credit cards, including how these cards can help you build your credit.
What is a secured credit card?
A secured credit card is different from a regular credit card in that you generally have to provide the card issuer with a deposit before you’re allowed to use your card. That deposit acts as collateral in case you default on your payments.
When using a secured credit card, you’ll make all of your purchases as if you were using a normal credit card. Yet, secured credit cards tend to have smaller credit limits than traditional credit cards as your spending limit is usually the same amount as your deposit.
Using a secured credit card responsibly is a great way to boost your credit history. For example, if your card issuer reports your credit card usage to credit reporting companies (ask them if they do this), then you can begin to build a history of responsible payments.
Plus, if you use a secured credit card each month to make purchases and then pay off your balance in full, you’ll show the credit reporting companies that you can properly manage credit.
How does a secured credit card work?
A secured credit card works like a regular credit card. As we stated above, the main difference is that you have to put down that initial deposit and you generally have a lower spending limit than other types of credit cards.
If you decide that a secured credit card is the right fit for you, you’ll apply for one through a credit card company or a banking institution. Ideally, try to find one without application or processing fees. You’re also better off choosing a card with low annual fees and a low interest rate.
During the application process, the card issuer will review your credit history. Next, you’ll make your first deposit. Once your secured credit card is set up, you can begin using it to make purchases.
Is a Secured Credit Card the Same as a Prepaid Card?
Secured credit cards are often confused with prepaid cards, but they’re very different.
For one thing, secured credit cards often have lower fees than prepaid cards.
Secured credit card companies also report information about your credit usage to the three credit reporting bureaus (Equifax, TransUnion, and Experian). A prepaid card company, on the other hand, typically doesn’t report your card usage to the credit bureaus.
Lastly, if you use your secured card responsibly, you might see your credit score improve over time.
The Pros and Cons of Secured Credit Cards
Like all things in life, secured credit cards have pros and cons.
- You can boost your credit score
- You can use your card to make secure purchases online
- You don’t need a high credit score to get approved for a card
- You generally receive a smaller credit limit
- You may encounter annual fees and high interest rates
- If you default on payments, you may lose your deposit
Can you use a secured credit card to build your credit?
A secured credit card can help build your credit. So, make sure your actions are reported to the credit reporting companies.
Plus, if your goal is to eventually move to a traditional credit card, you should talk to your card issuer about including a “graduation” component. A graduation component will allow you to transition from your secured card to a traditional card once you’ve demonstrated a pattern of consistent payments.
Is a secured credit card worth it?
When all is said and done, only you can answer this question: Is a secured credit card a good idea for me?
If you need help rebuilding your credit history, then a secured credit card may help. And, if you’re struggling to get a traditional credit card due to a poor credit history, you’re more likely to be approved for a secured credit card.
Here’s a final pro tip: Using your secured credit card responsibly can help improve your finances. Plus, over time you’ll create positive spending habits that can affect all areas of your financial life.