Best Secured Credit Cards
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By Beverly Harzog, Credit Card Expert Updated: January 08, 2020
If you're trying to establish or rebuild your credit, a secured credit card might be the answer for you. The best secured credit cards, if used responsibly, can help you build a solid credit history and raise your credit score. The issuer holds your refundable deposit as "security," and you use the secured card just like any other credit card on the market.
These cards are easy to use and look just like unsecured credit cards, so there's no stigma attached to them. Let's take a look at the details so you understand exactly how secured credit cards work and which are the best ones available to you.
Methodology: U.S. News analyzed nationally available secured credit cards from credit card issuers in the J.D. Power 2018 Credit Card Satisfaction Study top 10. Cards were evaluated based on card type, security deposit, annual fee and J.D. Power ranking.
Do You Have Bad Credit?
Your creditworthiness is defined by many factors, including your credit score and the contents of your credit report. When you apply for credit, lenders use your credit score and credit report to determine your credit risk. In other words, they decide if you're likely to repay your debts.
There are a few different credit scoring models used by the financial industry, but the FICO score is by far the most commonly used.
FICO scores range from 350 to 850. Your FICO score is calculated based on the data in your credit report collected by the three major credit bureaus: Equifax, Experian and TransUnion. That data includes things like your outstanding debt, payment history, defaults, judgments and bankruptcies.
Here's a breakdown of the FICO score ranges:
- Exceptional (800+)
- Very good (740-799)
- Good (670-739)
- Fair (580-669)
- Poor (579 and below)
Bad/poor credit refers to scores of 579 and below. When you have a bad credit score, you have very little creditworthiness. It can be nearly impossible to get approved for a traditional credit card with bad credit. The same is true if you are a new user with no credit history at all. What's cool is that the remedy for both of these situations can be found with secured credit cards.
What Are Secured Credit Cards?
A secured credit card can be a great way to establish or rebuild credit. But it's important to read the fine print. Some of these cards come with annual fees and other costs. There are unsecured credit cards for bad credit, but some of these cards have sky-high annual percentage rates and multiple fees. Because of this, the best secured credit cards are often a better choice than some of the unsecured credit cards that target those with bad credit.
Secured credit cards operate similarly to regular credit cards, except that they are secured with a cash deposit. The deposit is a protection for the bank/lender in case you default on a payment. If you have a secured credit card and you don’t make your payments, the credit card company can seize your deposit and you won’t get it back.
How do secured credit cards work?
To open a secured credit card, you make a cash deposit with the creditor. The creditor places your deposit into a secure account that you can’t access for as long as the card is active. If you miss any payments, the lender withdraws from that account to pay the overdue balance. It's easy to confuse secured credit cards with prepaid debit cards. These are totally different. With a prepaid card, you are withdrawing from a debit account every time you use it.
You're not buying merchandise on credit; you're buying items with cash from your debit account. You can't build credit with a prepaid debit card. But with a secured credit card that reports to the three major credit bureaus, you can build a credit history and boost your score.
Using a secured credit card is just like using an unsecured credit card. You must pay the balance or at least the required minimum payment by the due date. If you miss enough monthly payments, the creditor will use your deposit to pay your balance. If that happens, the effect on your credit score is the same as if you defaulted on an unsecured card.
Do whatever it takes to make your payments on time. A secured credit card can help you rebuild your credit, but if you don't use the card responsibly, it can make your credit score even worse than it already is.
Benefits of secured credit cards:
- Approval is easier because these cards present a lower creditor risk.
- These cards feature lower APRs than most unsecured credit cards that target people with bad credit
- Lower credit limits reduce the risk of overspending.
- Responsible use paves the way to getting approved for an unsecured credit card with a higher credit limit and no deposit.
Drawbacks of secured credit cards:
- A cash deposit is required to secure the account.
- Interest rates are usually higher for secured cards than for unsecured credit cards.
- Fees can be hidden in the fine print with some secured credit cards, so read it carefully.
You can check out this complete list of the Best Credit Cards for Bad Credit and learn more strategies for rebuilding your credit.
How Can You Choose a Secured Credit Card?
For secured credit cards, the most important features are:
- Annual fee
- Credit limit
- Initial deposit
The annual fee and initial deposit are money you’ll have to spend even if you never use the card. And if you do use the card, so you'll be building a payment history.
There used to be very few secured credit cards that didn't charge an annual fee. But now, some of the best secured credit cards have no annual fees. If there is an annual fee, it's charged directly to the balance either in one large sum or divided into monthly installments, starting the day you open the card.
Credit limits for secured credit cards are typically much lower than for traditional cards, depending on the amount of your deposit, of course. But once you’ve established a history of making on-time payments, you can ask for a credit limit increase. Be aware that this often means increasing your security deposit, so be sure you're comfortable with that if it's required by your card's issuer.
Having a higher credit limit will certainly make it easier to have a lower credit utilization ratio, which is the amount of credit you've used compared with the amount of credit you have available. Your ratio should not exceed 30%. With a lower limit, you might have trouble keeping a low ratio.
For instance, with a $200 limit, you should not exceed $60 in purchases (200 x .30 = 60). With a $900 limit, your balance during the month can go as high as $270 (900 x .30 = 270) before it negatively affects your score. Note: To boost your score even faster, keep your utilization ratio below 10%.
Many secured cards will evaluate a cardholder’s payment history after five to 12 months, but this varies by issuer. Do keep track of the time yourself, just in case the issuer isn't proactive about raising your limit or upgrading you to an unsecured card.
Your security deposit must be paid before the card is opened. The amount will vary based on your credit history, but it is typically between $200 and $2,500. The amount you deposit is often equal to the card’s credit limit.
The deposit is an upfront expense that you won’t get back until the account is either closed or upgraded to an unsecured card. So, be sure you choose a deposit amount that you can afford to do without for a year or more.
What Else Should You Consider When Choosing Secured Credit Cards?
You should apply for the best secured credit card you think you can get approved for. There are a variety of free educational scores at your fingertips online. They aren't FICO scores, but you'll get an idea of how bad your score is. On the bright side, you might find it's not as bad as you thought! Additional features to consider include:
Additional fees. The best secured credit cards don't have a lot of fees. But if your score isn't good enough for one of the best cards, don't fret. If you do the research and read the fine print, you'll find some secured cards that have limited fees.
But beware: Some lenders that target those with really, really bad credit have sky-high fees, such as monthly maintenance and initial processing fees. Just read the fine print carefully. And then read it again for good measure.
Ability to upgrade to an unsecured version. Some secured cards have a path to graduation. Discover, for instance, will upgrade you from its Discover it® Secured card to one of its unsecured versions, such as the Discover it® Cash Back card. Discover reviews your secured card account every eight months to see if you're ready for promotion.
But issuers differ widely when it comes to upgrading cardholders. And some issuers don't have a graduation path. Just focus on getting the best secured card you can, and as your credit improves, you'll get access to an unsecured credit card with another issuer.
APR and the penalty APR (if it exists). Don't expect a low APR with a secured credit card. But you know what? The APR doesn't matter.
That might seem like a bold statement, but here's why: If you pay your bill in full and by the due date, you won't pay any interest. If you know you'll carry a balance, then you aren't ready for a credit card.
Credit bureau reporting. The best secured credit cards report to all three major credit bureaus. But you should still confirm this by reading the fine print. If you can't find it, call the issuer and ask.
When the issuer reports your payment history, your score starts improving. Well, that's how it works if you pay on time, so don't miss any payments.
Prequalification. Some secured card issuers let you go through a prequalification process to avoid a hard inquiry, which can lower your score. But the issuers are also required, by federal law, to make a positive identification of who you say you are.
Just to avoid surprises, assume you might get a hard inquiry when you apply for a secured card. Your goal is to improve your credit and the few points you lose aren't worth worrying about at this point.
Rewards programs. Some secured credit cards offer rewards when you use your secured card for purchases. This is a nice fringe benefit, but stay focused on your goal, which is to rebuild or establish your credit history. Don't overspend! Have a budget and track your spending so you don't overdo it.
For complete information on all of these card features and how to evaluate them, read the U.S. News guide to Best Credit Cards for Bad Credit.
Comparative assessments and other editorial opinions are those of U.S. News and have not been previously reviewed, approved or endorsed by any other entities, such as banks, credit card issuers or travel companies.