Credit card issuers use your credit score to determine how much of a risk you pose and the likelihood that you will not be able to make your credit card payments. Consumers with great credit enjoy access to more credit cards with better terms and rates, while those with bad or no credit scores usually have a difficult time qualifying for a credit card. When they do qualify, the interest rates and fees are usually high.
If you have poor or no credit, one of the best ways to start building a healthy credit score is to open a credit card account. That might seem like a big catch-22, because applications from people with bad credit are often declined. However, you can still get a credit card even if you have bad credit — it’s called a secured credit card.
4 Tips on Getting a Secured Credit Card
1. Check Your Credit
Before applying for any type of credit card, check your own credit to find out where you stand. Checking your own credit does not count as a hard inquiry and won’t affect your credit score. If your credit score is low — usually below 600 or 500, depending on the type of score (FICO or VantageScore) the credit card lender uses — then it’s time to apply for a secured credit card to improve your credit.
2. Save Money for a Cash Deposit
Next, set aside some money. Many secured credit cards require a cash deposit. Charges are not deducted from the amount deposited (that’s a prepaid card). Instead, the money is held as collateral in case you default, and your deposit is returned once the account is closed in good standing. Some secured credit cards will hold your cash deposit in an interest-bearing account such as a CD, which typically earns a little more than a standard savings account. The credit limit is usually equal to the amount deposited minus the annual fee.
3. Analyze Fees, Rates and More
When shopping for the right secured credit card, look carefully at the fees and rates. Also check to see if the issuer reports to the credit bureaus.
Secured credit cards can come with multiple fees, including annual fees, maintenance fees, foreign transaction fees, returned payment fees, balance transfer fees and cash advance fees. Some of the fees are fair and to be expected. For example, many credit cards (secured or not) charge for balance transfers and cash advances. Other fees, such as maintenance fees, can be excessive and should be avoided.
Many secured credit cards charge an annual fee. The best cards charge $45 or less, with no additional maintenance fees. Avoid cards that charge for routine online account management, like checking balances or viewing statements. Also, if you plan to use the secured credit card outside of the U.S., be sure to choose a card with no foreign transaction fee, or plan to pay with cash. At 2 to 3 percent, this fee can add up quickly.
Look carefully at how a credit card issuer handles late payments. Some charge a late payment fee and convert the account to an exorbitant penalty interest rate. For a consumer building credit, learning to pay bills on time is critical. Failure to do so can negate much of the progress you’ve made toward building good credit. Understand the importance of on-time payments.
The interest rates secured cards charge can vary wildly, but at the end of the day, your rate won’t matter too much because the goal should always be to pay off the card every month to avoid paying interest. A zero balance is necessary for good budgeting and financial management.
Last, but certainly not least, be sure the secured credit card you choose reports to all three major credit bureaus. You’ll make absolutely no progress building credit if the products you use are not in your credit file.
4. Shop Around
If you’re having trouble finding the best secured credit cards out there, start with these four:
- USAA Secured Card Platinum MasterCard: This card charges a late payment fee but does not convert the account to a higher interest rate as a punishment. The security deposit earns interest, and the APR for purchases is as low as 9.90%.
- Capital One Secured MasterCard: The card has a $29 annual fee, and the security deposit can be as low as $49.
- DCU Visa Platinum Secured Credit Card: The credit card has no annual fee and no fee for balance transfers or cash advances. The foreign transaction fee is only 2 percent, and the APR for purchases is 11.50%.
- U.S. Bank’s Harley-Davidson Visa Secured Card: This card charges an annual fee and a fee for late payments, but the bank does not enforce a penalty APR.
How to Graduate From a Secured to a Non-Secured Card
After opening a secured credit card account, use it responsibly for six to 12 months. Make small, affordable charges for things that are already within your budget, and pay the bill off completely each month. Keep an eye on your credit report, because once your score reaches the 650 to 720 range, you’ll be eligible for credit cards targeted to consumers with fair or good credit. Once you’re approved for an unsecured credit card, close the secured credit card and request the return of your security deposit. And, of course, continue to build your credit with the unsecured credit card.