Do you have bad credit or no credit at all? If so, you may have a hard time getting a credit card — and you may have already experienced it firsthand.
One way around your less-than-ideal credit situation is to get a secured credit card. Secured cards remove the risk for the lender, so you’ll likely have an easier time getting one compared to an unsecured card.
But how exactly do secured cards work? Where can you use them? How else can you improve your credit?
We’ll cover the differences between secured and unsecured cards and help you decide whether you need a secured card. We’ll also give you a few more ideas you can use to raise your credit score.
Overview: Secured Credit Cards Defined
There are two major kinds of debt: secured and unsecured debt.
Secured debt is backed by collateral, which is actually a type of insurance that guarantees that the person taking out the loan will pay it back. For example, a mortgage is a secured debt because it’s tied to your home with a notice called a lien.
If you decide to stop making your mortgage payments to your bank, the bank can seize your house and sell it. Secured debts are much easier to get because banks and other lenders have the collateral to back them up.
On the other hand, unsecured debt doesn’t have any collateral. Unsecured debts are riskier for banks and lenders because there’s little recourse they can take if you stop making payments.
For example, let’s say you take out a personal loan and don’t repay the debt. Your bank might be able to sue you for the debt. But to do that, your bank would need to spend time, effort and thousands of dollars on attorney fees. Student loans are a type of unsecured debt — if you don’t pay your student loans, the bank can’t take your degree away.
A secured credit card is a credit card that has collateral. You have to put money down in the form of a deposit to open the card. The credit card company simply keeps your deposit if you stop paying your bills. A secured credit card can help you build the credit you need to open an unsecured card in the future.
How Do Secured Credit Cards Work?
You can get a secured credit card by filling out an application and putting down a deposit. Your bank or credit card company then issues you a line of credit that’s equal to the amount that you put down. For example, if you put down $500 to open a secured card, you can make up to $500 worth of purchases with your new card.
Beyond that, your secured card works the exact same way as any other credit card. Each month, you’ll have to make at least one minimum payment and your credit card company will charge you interest on what you borrow.
Your credit card provider will also refund the initial deposit you paid if you decide to close the card. If you stop making payments, the credit card provider will keep your deposit.
Secured vs. Unsecured Credit Cards: What’s the Difference?
The main difference between a secured card and an unsecured card is the deposit requirement. Secured cards, which aren’t offered by all credit card companies, require you to put down a deposit when you open the card. Unsecured cards don’t require you to put any money down except for any annual fees the card requires.
Secured cards usually have much lower credit limits than unsecured cards, thanks to the deposit requirement. Expect your secured card limit to range from $250 to $1,000, depending on your provider.
Secured cards usually have fees in addition to the deposit. You might have to pay an annual fee, an application fee and/or a processing fee to maintain your card. Often, secured cards also have higher interest rates than unsecured cards simply because there’s less market competition for secured cards compared to unsecured cards.
Not sure if a secured credit card or an unsecured card is right for you? Consider how you want to use the card. If you only want a credit card so you can build credit and make small, everyday purchases, a secured card is a great choice.
However, if you want to make a few large, one-time purchases on your card (maybe you want to upgrade your home appliances), you’ll probably need an unsecured card.
Ask your credit card company about review periods if you can’t get approved for an unsecured card with your credit score. Some major credit card providers allow secured cardholders to transition to an unsecured card after a certain number of on-time monthly payments.
Benefits of Using a Secured Credit Card
Secured credit cards offer a few benefits over unsecured cards.
Looser credit requirements
The biggest benefit of opening a secured card is that credit card companies aren’t as strict with credit requirements. If you have bad credit or no credit, you’ll still be able to open a secured card as long as you can pay your initial deposit.
Reporting to credit bureaus
Most secured credit cards come from major credit card providers and will automatically report your payments to credit reporting bureaus. This means that you can use a secured card to raise your credit score by making regular on-time payments each month.
Be aware that reporting can also hurt you if you miss a payment or you make your payments late.
Transition to an unsecured card
Do you prefer an unsecured card but can’t get one due to a low credit score? Some credit card companies allow you to “prove yourself” as a responsible borrower with a secured card.
After a certain number of months, you may be able to switch your card to an unsecured version as long as you make your payments on time. This typically takes less time than it would to wait for your credit score to rise.
How to Build Credit with a Secured Credit Card
Have you decided that a secured credit card is right for you? Using your secured credit card the right way can help you raise your score. Take these tips to heart when you get your secured card.
Control your spending
Even with a limited credit line, it can be tempting to overspend as soon as you have a credit card in your hands. Try to limit your credit card usage to small, occasional purchases that you can pay off quickly. This keeps you out of the debt trap and also helps you avoid monthly interest charges.
Watch your credit utilization, which the amount of total credit you use on your credit card. You would calculate your credit utilization by dividing your credit card balance by your credit limit. Let’s say your credit card balance is $200 and your credit limit is $1,000. Then, multiply that result by 100 to get your credit utilization percentage.
$200/$1,000 = 0.20
0.20 x 100 = 20%
In this case, credit utilization is 20%. In general, it’s a good idea to keep your credit utilization below 30%.
Make more than the minimum payment
The best way to quickly improve your credit score is by paying off your balance in full every month. If you can’t handle that, try to at least pay a little bit more than the minimum.
Just $10 more a month can help to reduce your credit utilization rate and improve your credit score. Going above and beyond with payments shows credit card providers that you only borrow as much as you can afford to pay back.
Set payment reminders
Even the most organized person in the world can forget a credit card payment due date! Make life a little easier on yourself by setting multiple payment reminders. You can set an alarm using your phone’s calendar app or you can mark the payment date on a physical desk calendar or planner.
Many credit card providers also allow you to opt into text and email reminders a few days before your due date. You can also contact your credit card company and authorize automatic bill pay. This feature deducts your minimum balance automatically each month, but be careful — withdrawals still go through even if your account will overdraft.
Securing Your Financial Future with the Right Card
The right credit card can be an asset when it comes to building your credit. And if you have bad credit or no credit, a secured card can be the saving grace that finally starts you on the path to a better score. All you need to do to apply for a secured card is fill out and submit an application.
But like any other credit card, a secured card can hurt you if you don’t use it correctly. Remember to always make at least the minimum payment each month, and never borrow more than you can afford to pay back. You’ll see your score rise in no time at all when you follow these simple principles.
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