Love them or hate them, credit cards are a necessity. Don’t agree? Try making a hotel or plane reservation, rent a car or going shopping online without a credit card. You will soon see how biased our world is against people who don’t have credit cards.
Related article: Want a Student Credit Card? Here Are 6 Tips to Get the Best Deal
So what can you do if your credit score doesn’t qualify you for a regular credit card? A secured credit card may be the answer.
What is a Secured Credit Card?
A secured card is a type of credit card that is backed by a refundable deposit in a collateral account. It gives you the worldwide purchasing power, convenience and flexibility of normal credit card, but your credit limit is determined by how much money you deposit as a refundable security.
You provide an upfront deposit of anything from $300 to $10,000 and that becomes your credit limit. This means banks can lend you money with no risk. If you max out your card and don’t pay your debt, the bank or credit union will simply report you to the credit bureaus, take the cash you deposited in the collateral account and call it quits.
What Are the Benefits of Secured Card?
Secured cards work like armbands when you’re learning to swim. A fantastic way to learn how to manage your credit, but you don’t necessarily want to wear them for the rest of your life.
Secured credit are also used to build or repair your credit. It’s not just about getting a higher credit score either. Secured cards give you the chance to build a relationship with your bank or credit union. If you show you are responsible with your money, pay your bills on time, and carry a low balance, you may qualify for an unsecured credit card way sooner than your credit score alone would allow.
How Do You Apply for a Secured Card?
The first step is to find a financial institution that offers secured credit cards. Not all banks offer secured cards. Many are moving away from secured cards and prefer to offer unsecured cards with lower limits and higher interest fees instead.
1. Start with your local credit union. Credit unions usually offer lower fees and better terms than banks, which are for profit corporations and must answer to shareholders. If your local credit union is not an option, there are excellent credit unions anybody can join, such as Digital Federal and Lake of Michigan.
2. Shop around and compare. Some banks and credit card providers, such as Wells Fargo, US Bank and Capital One use secured cards as a way to build their client base and are willing to offer better deals.
3. Open an account, make your security deposit and start using your account. If your main purpose for having a secured card is to build credit and you have the cash, deposit as much as you can and pay your balance in full every month. The higher your credit to debt ratio the better for your credit score.
Who Qualifies for a Secured Credit Card?
Some people confuse secured cards with prepaid cards and think anybody can qualify for them. This is incorrect. Unlike a prepaid card that is simply loaded with cash and spent, the money you deposit onto a secured credit card becomes your credit limit. Default on your payments? The bank can take your deposit.
We found a great explanation that details the differences between secured credit cards and prepaid cards here.
Many secured cards are more inexpensive and provide better terms and rewards than many low-end unsecured credit cards. Although the requirements for a secured card usually are lower than for an unsecured card, banks and credit unions sometimes reserve secured cards for clients who are just starting to build their credit and filter out customers who have already made bad financial choices and blown away their credit.
Having said that, most people will qualify for a secured card. Particularly if they buy additional financial products and open a checking and savings account.
Which Are The Best Secured Cards?
The best secured credit card for you will depend on how you use it. If you regularly carry a balance on your card, you need a card with a low interest rate. However, high interest rates don’t make much of a difference if you always pay your balance in full. In such a case, you may want to focus on whether or not you have to pay a fee to have the card and what rewards and perks it comes with.
One thing you must do is make sure the secured card issuer regularly reports to all three major credit bureaus, because that is what is going to improve your credit score.
It is a challenge to pick a winner out of the dozens of cards available. If you’re looking for a good card, here are three of our favorite secured cards.
US Bank LifeMiles Visa Secured – The Secured Card With a Rewards Program
US Bank’s LifeMiles Visa Secured is a rare breed among secured cards because it has a sign up bonus of 5,000 (worth about $50) and a decent rewards rate of 1%. If you spend a $1,000 a month on your card and pay your balance in full, you can make another $120 on top of the $50 signup bonus.
The interest rate is 22.99% on purchases and transfers, and 24.24% on cash advances, crazy high when you consider you’re borrowing your own money. So this is not the card for you if you have struggled to keep your balance down in the past.
The catch is there is a $25 annual fee on the card, but the fee is waived the first year. That makes this secured card great for a one year stint to improve your credit before applying for an unsecured credit card.
The DCU Visa Platinum® Secured Credit Card – No Annual Fee and Low Interest Rates
The DCU Visa Platinum® Secured Credit Card won SuperMoney’s top secured credit card award for 2014 for good reason. It has no annual fee and a low APR of just 11.5%.
Not only is the card inexpensive, it also includes valuable perks, such as $50,000 in travel insurance and free auto rental collision damage waiver. The only catch is you need to be able to deposit a minimum security of $500.
Also, if you don’t qualify to be a member of Digital Federal Credit Union through your work or where you live, you’ll need to make a one-time donation to one of their charities to qualify to become a member. A $10 donation to a worthy cause, such as the Reach Out for Schools foundation, is a small “price” to pay for the great value this card offers.
Capital One Secured Mastercard – The Hybrid of Secured Cards
The Capital One Secured Mastercard has an annual fee of $29, an interest rate of 22.9%, and a late payment fee of $19. That’s the bad news. The good news is that depending on your credit you could qualify for a $200 line of credit while only making a security deposit of $49 or $99, which makes this card a kind of hybrid between a secured and an unsecured card.
That is great news for those trying to build their credit but don’t have a lot of cash lying around to deposit as a security. Of course, if you want a line of credit of more than $200, you will have to shell out some more money.