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Secured Credit Cards

What Is a Secured Credit Card and How Does It Work? (2022)

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With most shopping and payments today being done with credit cards, owning a credit card is no longer optional. More and more stores and services are abandoning cash and switching to cards, so if you mean to pay for things, you will need to become a credit card owner yourself.

However, if your credit score is 579 or below, doing so can become quite an issue. It can be quite difficult to find a credit card issuer willing to give you a chance and approve you for its product if your credit score is poor. But, even under these circumstances, you can still go for one final option and request a secured credit card.

In fact, doing so can be quite beneficial, as it can help you build your credit, practice good credit card habits, prove your trustworthiness over time, and even build up your credit score. This form of credit will require a cash deposit in order to secure a line of credit, but after that, the card will behave like any regular credit card.

What exactly is a secured credit card?

We would not be surprised if you never heard of a secured credit card, since this is a type of card that is backed by a cash deposit. Most people who have cash on hand would likely deposit it into their debit card account and call it a day. However, a secured credit card can bring additional benefits, which might make it a better option if you are aware of its capabilities.

So, let’s start with the deposit. Usually, it is equal to the credit limit, which tends to be equal to 50%-100% of the amount of the initial deposit. So, if you apply for the card and put down $1,000 as collateral, then you will be able to get a line of credit equal to $500-$1000 in return.

This is the best option to go for if getting approved for an unsecured credit card is not possible. Meanwhile, getting that approval is usually impossible if your credit score is poor. You also might not be able to improve your credit over time without a lender who will give you a line of revolving credit. Essentially, you need a credit card to build credit, and you can’t get it if you have poor credit score, which seems quite counterintuitive, but that is how the system works, which means that you have to find a way around it, and getting a secured credit card is the best way to bypass the issue.

How does a secured credit card work?

The way secured credit cards work is pretty simple. If you are familiar with how debit cards work, then you already understand most of the process. You are essentially relying on cash deposits which enables your secured line of credit and allows you to make purchases-

You can apply for one of these cards at credit unions, banks, or even directly with our recommended secured credit card companies. Know that any entity that you turn to will check your credit history during the approval process, but since you will have to provide a cash deposit, even low credit users will likely be approved.

The card provider will also report information about your account to three entities — TransUnion, Experian, and Equifax. This will be beneficial for building up your credit score, so eventually, you may even become eligible to get an actual credit card. However, this also means that you should only choose companies that will, in fact, report your payment history to the mentioned entities.

Once you are approved for the card, you will have to deposit your collateral, which can be anywhere from $200 to $2,000 or even $3,000. With some providers, this initial deposit will become your credit limit, although sometimes, the limit might even be lower than the initial deposit, so keep an eye out for that.

But, after you make your deposit, you will be able to start using the card for purchases, whether in person or online. And, once you pay off all the balances for recent purchases, you will be able to use your card again. Another thing to note is that failing to pay your balance in every month will mean that interest will start piling up.

Secured and unsecured credit cards: How do they compare?

For most people, unsecured credit cards seem like a better option, as there is no need to make deposits that will act as collateral. You simply use the card, pay off the balance, and use it again, with no initial deposit necessary. Unsecured cards also usually offer certain perks, like lower fees, lower interest rates, and alike.

Unfortunately, these perks are only available for those whose credit score is classified as good or excellent — usually 670+. Secured credit cards are available to pretty much anyone, and their biggest benefit is that it allows you to start building up your score over time. All you need to do is pay off your balance in time, and your credit score will start growing, giving you a better reputation among financial services.

It might take you a while to switch from secured to an unsecured card, meaning 12 to 18 months in most cases. But, if you can keep managing your payments during this time, you will be able to build up your credit score in less than two years.

Secured credit card vs prepaid debit card: How do they compare?

We mentioned earlier that secured credit cards are not too different from debit cards. However, one big difference that you need to know is that debit cards do not impact your credit score. So, if building up your credit score is what you are looking for, then a secured credit card is your best option.

With them, you borrow and pay later. With debit cards, you cannot spend money unless you fill up your card first. A prepaid debit card doesn’t depend on your credit score at all, there is no interest to pay since you don’t get to spend the money upfront, and when it comes to special perks such as rewards or annual fees, that depends on which issuer you go with.

Who should get a secured credit card?

So, to summarize, you should consider applying for a secured credit card in two cases — when you want to improve your credit and when you want to graduate to an unsecured credit card and experience lower fees and better perks.

Building your credit with a secured credit card is a slow process, but it undoubtedly works, as long as you make sure that your payment provider will, in fact, report your financial situation and if you pay back your balances in time and in full. In doing so, you will prove that you are, in fact, trustworthy and that you possess good money management skills, which will increase the banks’ confidence in you, and even lead them to allow you to get unsecured credit cards.

This leads us to the process of moving to an unsecured credit card, which is possible, but a lengthy procedure that first requires you to improve your score. Once you successfully do that, you can upgrade to an unsecured card with your issuer or go to another bank or financial institution to do so.

A few tips to remember

While using a secured credit card is fairly easy, let us just point out a few important tips that you should keep in mind. These include the following:

  • Don’t be late with paying your balance. This one should be fairly self-explanatory. You need to start proving yourself to the card issuer, and the best way to do so is to be accurate, precise, and punctual with your payments.
  • Don’t overspend. Again, you need to show that you can be precise, so do not overspend. The best way to go about it is to use your secured credit card for your fixed purchases, so there will be no surprises and no accidental overspending.
  • Make sure that the bank reports to the three main bureaus. Your goal is to improve your credit score over time, which can only happen if your bank reports to three main bureaus. If it doesn’t, then your secure credit card is nothing more than a fancy debit card.
  • Your credit utilization rate should be under 30%. Credit utilization is the total amount of available credit that you are using vs the total amount of credit you are granted. Ideally, it is best to stick to 30% or lower, as high utilization means you are close to maxing out your credit card, which can reflect badly on your credit score.

Conclusion

Secured credit cards are not as good as unsecured ones, but if you cannot get an unsecured one due to a poor credit score, then they are the next best thing. They can help you improve your credit score over time and eventually move on to unsecured credit cards. All you need to do is make sure to find a good issuer, and if you are not sure where to start and who to turn to, we recommend finding the best secured credit cards here. With a little patience and careful money management, you can do wonders to improve your credit score, so definitely do not pass up an opportunity to do so.

Ali is a freelance writer covering the cryptocurrency markets and the blockchain industry. He has 8 years of experience writing about cryptocurrencies, technology, and trading. His work can be found in various high-profile investment sites including CCN, Capital.com, Bitcoinist, and NewsBTC.

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