Maybe your credit isn’t exactly great—or it’s totally in the dumpster. Or perhaps you don’t even have a credit score. How are you supposed to show that you can use credit responsibly if your past financial activities don’t have potential creditors lining up to lavish you with offers? A secured credit card is one means by which to start building a credit history.
Unlike a typical credit card, where you’re given a credit limit and can spend up to it before paying the bill, a secured credit card requires an up-front deposit to guarantee you can pay. Your credit limit for the card will match the amount of the deposit you submit. Then, after a certain amount of time, you get your deposit back.
But not all secured credit cards are created equal. Here’s what to look for if you’re considering applying for one of them.
Reporting to credit bureaus
Whether or not the card issuer reports your credit activity to credit bureaus is the most important thing to consider when choosing a secured card. The whole point of coming up with the cash to make a deposit for a secured credit card is so that your new and exciting—yet responsible and reasonable—credit use will be reported to at least one of the credit bureaus: Experian, TransUnion or Equifax.
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Most card issuers do this, but if you don’t see this policy noted clearly on the application details page for the card, call to ask before applying. When you’re rebuilding your credit or building it from scratch, it will defeat the purpose of paying the deposit and making on-time payments if no one but you and the card issuer know about it.
Deposit amount
The initial deposit for a secured card can range from $200 to $2,000, and you may have a choice of how much you’d like to deposit within that range. It’s not an invitation to spend; your monthly bill will be paid separately from your deposit, so you need to have enough cash for the deposit plus enough money to pay for whatever you use your card for each month. If you’re only confident that you can manage a $200 credit limit, don’t sign up for one that’s two or three times that, even if you have that much cash available.
Interest rate
You can typically expect to get offered lower interest rates if you have a higher credit score. If you’re opening a secured credit card designed for people with poor credit, you can expect an interest rate of 25-28%. Lower interest rates in the 13-18% range can be found at many credit unions.
In theory, the interest rate doesn’t matter, because you’ll pay your balance in full each month and will never pay a cent toward interest. But even the best-laid plans can go awry, so if you can snag a lower interest rate, snag away. If, for some reason, you have to carry a balance for a month while using a secured card, you might pay almost 30% for the privilege, even if that balance is small.
Annual fee
You may see an annual fee of up to $49 listed, but please don’t pay that. There are so many secured credit card options with an annual fee of zero. You’re already putting down a deposit. Don’t pay extra to build credit! Big credit card issuers like Capital One and Citi often have zero-fee secured cards, and a Google search for “best secured credit cards” will surely include options that don’t have fees.
Rewards
Rewards programs for secured cards are few and far between, but there are some out there. This is not the time to brainstorm all the world travels you’ll take with your credit card rewards, however. You’re building credit, not accumulating points on a Platinum AmEx! But some cards do offer cash back at around 1 or 2%.
Upgrade policy
Once you build up a solid payment history on a secured credit card, you can often upgrade to a “regular” unsecured credit card. Many secured cards do this automatically and will let you know if there’s an opportunity to transition to a standard credit card as early as eight months after you pay your deposit.
Find out what the upgrade policy is and how the process works before you apply if you’re interested in building a history with a single credit card issuer.
