Secured credit cards: One way to build a credit history from scratch

A secured credit card is backed by a deposit that will be the equivalent of your line of credit.

A secured credit card is a type of credit card with a line of credit backed by a security deposit.
Because it doesn’t require a credit history or credit score, secured credit cards are an appealing option for building a credit history.
But secured credit cards charge higher annual interest rates and fees compared to traditional credit cards.
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Your credit score broadcasts to companies how likely you are to repay a debt. A high credit score makes it easier to do a range of things, from applying for an apartment to getting a loan. 

Having good credit is also important when applying for a credit card, which can help further build credit. This can seem counterintuitive, especially if you have a low credit score or no credit at all. If you’re in this situation, a secured credit card might be one way for you to build your credit.

What is a secured credit card?

A secured credit card is a type of credit card that gives you a line of credit backed by a security deposit you pay when you sign up for the card. Like most starter credit cards, it’s accessible to people who have a low credit score. Most credit card companies won’t perform credit checks for secured credit card applicants. 

How secured credit cards work

Traditional credit cards use undisclosed mathematical algorithms that rope in credit score, income, and payment history to determine your credit limit. Alternatively, your credit limit on a secured credit card will be how much you deposited. Credit card companies hold this money as collateral if you default your credit card or rack up severe delinquencies. 

Assuming you make your payments on time, the credit card company will return your security deposit when you pay off your remaining balance and close out the card. After a certain amount of time and credit built on the secured credit card, companies may also allow you to convert your secured credit card to a traditional card, at which point your security deposit will also be returned. However, an upgrade isn’t guaranteed.

Secured vs. unsecured credit cards

Secured credit cards

Unsecured credit cards

Secured credit cards often don’t require a credit check and will take applicants with low credit scores

Credit card companies recommend a good to excellent (670-800+) credit score when applying for a card

Credit limit determined by how much money is deposited

Credit limit determined internally based on a number of factors

Often charges higher APRs

Offers APRs based on your application and credit scores

How to get a secured credit card

Without the need for a credit check, the process for applying for a secured credit card is simple. Here are some steps to get you started.

Step 1: Determine your credit score

Before you decide you need a secured credit card, it may be helpful to know what your credit score is to see if there are other credit card options available to you at your current credit score. There are a number of services available that will help you determine your credit score for free

Step 2: Find which secured credit card is right for you

Most major credit card companies, including banks and credit unions, offer a secured credit card option. These cards can vary based on minimum and maximum deposit amounts, annual fees, and interest rates. Certain cards can also come with benefits including cash back or an introductory 0% purchase or balance transfer APR for a certain amount of time. 

Step 3: Provide necessary information and security deposit

Since most of these secure credit cards don’t require a credit check. Here’s some other information they might ask for:

Date of birthAddress (can’t be a PO box)Social Security numberEmployment statusOccupationAnnual incomeMonthly housing payments

On the application form, you’ll also be asked how much you want to deposit as your collateral. Depending on the company, this can be anywhere from $200 to as high as $4,900. You will need a non-IRA bank account to make this deposit. Some banks also require you to have a bank account with that company.

Once you have your first secured credit card, it’s important to make your payments on time each month. Though secured credit cards offer a way to build credit, they are subject to the same rules as normal credit cards. Missing payments or making late payments late can have an adverse effect on your credit score, which defeats the purpose of having a secured credit card. 

Furthermore, with higher interest rates and fees on a secured credit card, you may end up paying more interest than normal credit card users. Additionally, some credit card companies reserve the right to take the due amount directly out of your bank account

Quick tip: One determining factor of your credit score is the percentage of your available credit you use, ideally under 30%. The higher the security deposit, the more you can use your card without putting your credit score at risk. You’ll be able to get this back. 

With little-to-no prior credit requirements, secured credit cards are one way to reestablish credit or start a credit history. However, with high interest rates and a self-determined credit limit, this card should be used with extra care. 

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