Wondering how you can build your credit history if no one will give you credit?
It’s a common dilemma when you’re just starting out, or if your credit has some past blemishes and you’re looking for a second chance.
Fortunately, secured credit cards offer a solution. They can set you on a path to building (or rebuilding) a credit history you can be proud of.
In this article, we’ll look at:
- How secured credit cards work
- What you should look for when selecting a card
- How to use a secured credit card
- Our recommendations for secured cards (that when used responsibly can significantly improve your credit score)
Let’s get into it!
How do Secured Credit Cards Work?
Secured credit cards work like regular credit cards in that you charge purchases and subsequently pay for those charges at a later date when billed by the credit card issuer.
Where secured credit cards differ is they’re designed for consumers with bad credit or no credit. Since the consumer hasn’t proven responsible credit management, the card issuer requires a security deposit up front as collateral to grant credit to the applicant.
The amount of the credit limit granted on the secured credit card is frequently the same amount as the security deposit. Security deposits can be returned to the consumer at a later date after managing the card responsibly or at card closing.
What to Look for When Selecting a Secured Credit Card
Even if your credit is bad or non-existent, you still have choices when it comes to getting a secured credit card. However, all secured credit cards are not created equal, so you’ll want to compare cards to find a card you can qualify for that matches your preferences.
Get answers to these questions before you apply for a secured credit card:
What are the requirements to qualify for the card?
- Some secured credit card issuers do a hard pull on your credit, others do not. Secured credit cards require security deposits, so you’ll want to know the amount required before you apply.
Does the secured card report to the 3 major credit bureaus?
- You’ll want to make sure the secured card you’re applying for reports your card activity to the 3 major credit bureaus (Equifax, Experian, TransUnion) so this positive activity can help you build your credit history.
Does the issuer offer an unsecured credit card upgrade option once I’ve proven my creditworthiness?
- It’s always a plus to be able to upgrade your card to an unsecured credit card that does not require a security deposit. Not many secured cards have this feature, but if they do, it’s a good option to have.
How much of a deposit do I need to put down and is the deposit ever refunded?
- Secured credit cards specifically state the conditions in which you will receive your security deposit returned. You may need to close the account in the future to receive your deposit or receive it after a certain number of on-time payments.
How much is the annual fee? Are there other fees that come with the card?
- You may have to pay an annual fee to get the secured credit card you want, but you’ll want to compare the amounts between cards. You’ll also want to review the card’s rates and fees before applying.
What is the interest rate if I have to carry over a balance?
- Ideally, you’ll pay off your balance each statement period. But if you do have to carry a balance, you’ll want to know how much interest you’ll be charged. Some secured credit cards charge as much as 30% APR (by the way, we’ve covered 0% APR credit cards in another post).
- You can find more information on how interest is calculated and how to avoid paying it in our article dedicated to the ins and outs of credit card interest.
Bottom Line: You may not have a strong credit history and the ability to qualify for a premium rewards-earning credit card, but you still have choices when it comes to selecting a secured credit card. Do your homework and select one that fits your situation and objectives.
How to Use a Secured Credit Card to Build or Re-build Credit
Five factors make up your credit score, and so the best way to build or rebuild your credit is to look at how you can impact each of these factors when managing your secured credit card wisely.
Improving the 5 Factors of Your Credit Score With Your Secured Credit Card
Let’s break down each factor of your credit score and how you can manage your secured credit card to influence those factors positively.
Payment History: 35%
- Making your payments on time is the most important factor impacting your credit score and therefore the most important factor in managing your secured credit card to positively impact your score.
Credit Utilization: 30%
- Even if you’re granted a $500 credit limit on your secured credit card, you won’t want to use it all, as doing so affects your credit utilization rate. If you charged $400 in a statement period, for example, you would be at 80% utilization, and this would negatively impact your credit score.
- It’s better to make small purchases each month and pay them off on time.
Length of Credit History: 15%
- Selecting a secured card that you can keep indefinitely to build the length of your credit history is ideal. You’ll want to make sure there’s an option to get your security deposit refunded while you still have the card open, or the ability to upgrade the secured card to an unsecured card with responsible card management.
Amount of New Credit and Credit Inquiries: 10%
- You’ll want to do your research to minimize the amount of new credit and new credit inquiries on your credit history. Make sure you meet the qualifying criteria for a secured credit card to avoid being denied. Remember, hard credit inquiries are counted.
Overall Mix of Credit: 10%
- It’s good to have a mix of different credit types such as a car loan, mortgage, and credit cards. As you responsibly manage your secured card, you’ll be able to qualify for other types of credit and improve this factor. Fortunately, the mix of credit you have makes up only 10% of your score.
Hot Tip: Check your credit score after a few months of using your secured credit card to make sure your activity is being reported. The practice is also a good educational tool to learn how your credit score is constructed.
Best Secured Credit Cards With No Hard Credit Pull
If your credit is terrible or you have no credit at all, you’ll be happy to know that you can still qualify for a secured credit card. Since these issuers do not access your credit score with a hard pull (an inquiry that’s reported on your credit report), your chances of getting these secured cards are excellent.
You’ll need to provide a security deposit when applying for each of these credit cards, and the amount of your credit limit will be equal to the amount of the security deposit.
Your security deposit will be returned when you close your account, and your balance is paid in full.
Hot Tip: For a secured credit card that doesn’t require a credit check, look into the First Progress Platinum secured cards. These cards extend credit against a security deposit rather than your credit status.
Best Secured Credit Cards With No Annual Fee
It’s good to know you can find a secured credit card that doesn’t charge an annual fee.
|Best Secured Credit Card with No Annual Fee||Minimum Deposit Required||Benefits|
|Citi® Secured Mastercard®|
- Reports to the 3 leading credit bureaus
- Mastercard benefits
|Digital Federal Credit Union Visa® Platinum Secured Credit Card|
- Credit limit equal to funds deposited
- 13.25% APR variable
- Reports to the 3 leading credit bureaus
- No fees for cash advance
While the Digital Federal Credit Union secured card has a decent APR, you are required to join the credit union and open an account before you can apply for their secured card; a minor requirement, but an extra step for sure.
Best Secured Credit Cards With a Low APR %
Ideally, you’ll want to pay off your secured credit card each statement period, but if you occasionally have to carry over a balance to the next statement period, you will be charged interest. The amount of interest is referred to as an annual percentage rate (APR). Of course the lower the APR, the better.
Unfortunately, secured credit cards normally come with high-interest rates that can exceed 30% in some cases. But there are some exceptions: secured credit cards that offer APRs that can be much less than what normal secured credit cards charge.
Bottom Line: You won’t have to pay any interest if you pay your balance in full by the statement due date each month but if you occasionally carry a balance, you’ll want to select a secured card with a lower APR.
Best Business Secured Credit Cards
When you’re starting your business, you’re going to need a credit card. But what if you’re struggling with limited or no credit? Fortunately, there are secured credit cards specifically designed for business owners, and they earn rewards!
The BBVA Compass Secured Visa Business card earns 3 points per dollar on your choice of office supplies, restaurants, or travel purchases and 2 points per dollar on your choice of gas, home improvement, or utilities. The downside is you have to select your categories every quarter or your earnings revert to 1 point per dollar spent.
Points can be used at the rate of one cent each toward account credits, gift cards, travel, merchandise, or charitable donations. The card is only available in Alabama, Florida, Texas, Arizona, Colorado, California, and New Mexico.
The Wells Fargo Secured Business card allows you to select how you earn rewards: either cash back or rewards points. It offers a 10% increase in value when redeeming rewards points online. Your credit limit on the card is equal to 100% of your security deposit versus only 90% on the BVVA Compass Secured Visa.
The Wells Fargo Secured Business card is more widely available than the BBVA card, which is only offered in a limited number of states. The Wells Fargo Secured Business card also has the potential to be upgraded to an unsecured card with responsible card management.
Either secured card would be a good choice for a business with credit challenges.
Other Secured Credit Cards
Active military members, former military, an eligible family member, or a cadet/midshipman can join the United Services Automobile Association (USAA) and have access to a wide range of credit card options including secured credit cards. For those with higher credit scores, see our post on the best credit cards for active military members.
First Progress offers secured Mastercards that do not require a minimum credit score or a credit history, making it easy to qualify for either of these secured cards.
Hot Tip: If you’ve done your due diligence and you’re ready to move on from your secured card, check out our article on the 10+ Easiest Credit Cards to Get Approved For. If you’re ready to start earning travel rewards, check out our piece on The Best Travel Rewards Credit Cards.
Tips for Applying for a Secured Credit Card
Applying for a secured credit card is similar to applying for a regular credit card, but some additional considerations are pertinent to the secured credit card application.
Here are a few tips to consider before you hit that submit button on your secured credit card application.
- Research the qualifications for the card upfront to make sure you meet the requirements.
- Be as accurate as possible when completing the application.
- Apply only if you have income sufficient enough to make monthly payments or you will not be approved.
- Apply only if you have enough money to fund the necessary security deposit as it will be needed before you can be approved.
- Review the fees, rates, and charges thoroughly.
Bottom Line: Applying for a secured credit card is not difficult, but you’ll want to be sure you understand clearly how the card works up front to ensure you’ll be able to use it properly and build or rebuild your credit.
A Secured Credit Card Alternative: The Credit Builder Account
An alternative to a secured credit card is available with Self, formerly Self Lender. It’s essentially a secured loan that doesn’t require a hard pull on your credit or any credit history. The loan is deposited immediately into a certificate of deposit for collateral. You make scheduled monthly payments on the loan, and at the end of the term, you receive the funds that are in the account.
When you open a Credit Builder account with Self, your on-time monthly scheduled payments are reported to the 3 major credit bureaus, so you’re building credit while you save.
At the end of the period, you receive the balance in the account. Keep in mind that there is interest charged on the loan, but with no hard credit pull or credit history required, it’s an easy way to build credit without having to come up with a security deposit as you would with a secured credit card.Hot Tip: If you’re interested in learning more, check out our in-depth guide to Self!
Getting a secured credit card can offer a fresh start for bad-credit or no-credit consumers and can help you build a good credit history.
Your good credit can then be leveraged into qualifying for unsecured rewards-earning credit cards that do not require a security deposit and offer more benefits at potentially less cost.