A secured credit card is a good way to improve your credit score or build credit if you're starting from scratch

Clint Proctor

Sep 19, 2019, 00:53 IST

A secured credit card is a good way to improve your credit score or build credit if you're starting from scratch

damircudic/Getty Images

A secured credit card can help you improve your credit score.

A secured credit card requires a cash deposit to serve as collateral against your credit limit.
Since the security deposit minimizes the card issuer's risk, most secured credit cards are easier to qualify for when you have poor credit or none at all.
When shopping for a secured credit card, look for a card that reports to all three major credit bureaus, provides a clear graduation path, and charges minimal fees.
Visit Business Insider's homepage for more stories.

A good credit score makes it easier to get approved for a loan or qualify for lower interest rates. But even if you don't plan to apply for a loan soon, your credit score can still affect your daily life.

Utility companies, insurance providers, phone companies, and landlords have all been known to use credit scores when considering a new customer or tenant.

Using a credit card responsibly can help you build your credit history and improve your score. But many credit cards require credit approval as well, so they can be hard to qualify for when you have bad credit or none at all.

In this situation, you may want to consider applying for a secured credit card. Let's take a look at what a secured credit card is and how it works. We'll also discuss what to look for when you're shopping for a secured credit card.

What is a secured credit card?

A secured credit card requires a cash deposit that will serve as collateral and minimize the card issuer's risk. Unsecured credit cards, on the other hand, do not require a deposit. The credit limit on a secured credit card will usually be equal to the deposit you make.

While secured credit cards provide extra protection to your lender, they otherwise work just like a normal, unsecured card. And as long as your card issuer reports to the major credit bureaus, secured credit cards can help you improve your credit score.

To help you build your score faster, you'll want to keep an eye on your credit utilization rate (how much of your available credit you use each month).

Many credit experts recommend that you spend less than 30% of your available credit in a given month. Since most secured cards have low credit limits (often $300 or below), they require a bit more attention and discipline to stay within that range.

Some secured credit cards include a graduation component, where cardholders are automatically transitioned to unsecured versions of the card (receiving a refund of their deposit) after a certain period of time. Or, once your credit score improves, you may want to apply for a credit card that offers better terms, interest rates, or rewards.

What to look for in a secured credit card

If you're in the market for a secured credit card, here are a few things you'll want to pay attention to.

Credit reporting

With any credit card, you'll want to make sure that you get credit for all the payments you make. But that's especially true with a secured credit card where you're having to put up cash to use it.

That's why you'll want to make sure that your secured card reports to all three major credit bureaus, Experian, Equifax, and TransUnion. Most secured cards do, but it's still something you'll want to confirm before you apply.

Clear graduation path

If possible, you'll want to find a secured card that clearly states how long you'll need to wait before you can graduate to a partially secured or fully unsecured version of the card.

For instance, the Discover it® Secured card promises to begin reviewing your account for a deposit refund after eight months (it's also one of the few secured credit cards that offers rewards). And the Secured Mastercard® from Capital One® will consider increasing your credit limit after only five on-time monthly payments.

Low fees

If you apply for a secured credit card, you're already agreeing to put up a cash deposit for a card that may not offer any rewards. But, in exchange, secured credit cards can be easier to qualify for and that can be a worthy tradeoff.

However, many secured credit cards also charge exorbitant fees. Whenever possible, try to find a secured card that will treat you fairly, like the cards listed below.

The Discover it Secured card, Secured Mastercard from Capital One, and the Citi Secured Mastercard all charge no annual fee. And the Discover it Secured card won't charge a fee for your first late payment either, and paying late won't raise your APR.

If you don't qualify for any of these cards, you may want to consider the OpenSky Secured Visa Credit Card. It doesn't require a credit check to apply, yet still charges a reasonable $35 annual fee.

Secured credit cards can be a valuable credit-building tool. But make sure that the secured credit card you choose is truly designed to help you improve your credit situation and not take advantage of it.