It can be nearly impossible to get credit if you don’t have already have a credit score, or if your score is too low. So what are you supposed to do if you want to show potential creditors that you can use credit responsibly? A secured credit card might be the answer.
Unlike a typical credit card, a secured credit card doesn’t really offer credit, per se, as it requires an up-front deposit that usually matches your credit limit. Once you use the card for a certain period of time, you get your deposit back and can upgrade to a regular, unsecured credit card.
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
The most important thing to consider when choosing a secured card is whether the card issuer reports your credit activity to credit bureaus. The point of the secured card is to build up some responsible credit use that can be seen by at least one of the credit bureaus: Experian, TransUnion, or Equifax. Most card issuers do this, but if you don’t see this policy noted clearly in the application details for the card, call and ask about it before applying.
How much is a deposit?
The initial deposit for a secured card can range from $200 to $2,000, and you might have a choice on how much you’d like to deposit within that range. Remember that the deposit is held by your creditor, so you need to have enough cash for the deposit plus enough money to pay for whatever you use your card for each month. A high limit can help with your credit utilization, which in turn helps your credit score, but you’d only want to take advantage of that if you’re comfortable putting up the cash needed for the deposit.
What’s the interest rate?
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. (For comparison, the average interest rate for regular credit cards is currently 16.04%)
In theory, the interest rate shouldn’t matter, because you’ll want to pay your balance in full each month and never pay a cent toward interest, especially for secured cards. But even the best-laid plans can go awry, so it’s prudent to shop around for the lower interest rate.
Is there an annual fee?
You may see an annual fee listed, but you really don’t need to pay that. There are so many secured credit card options with an annual fee of zero, plus, 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 annual fees.
What about rewards programs?
Rewards programs for secured cards are few and far between, but there are some out there. Rewards aren’t the priority, however—you’re building credit, not chasing points on a Platinum AmEx. That said, cash back rewards can be a nice perk, as some cards offer cash back at around one or two percent.
How soon can you upgrade to an unsecured card?
Once you build up your payment history on a secured credit card, you typically can upgrade to a “regular” unsecured credit card and get your deposit back. Many secured cards do this automatically, or they’ll let you know there’s an opportunity to transition to a new 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.