How Does a Secured Credit Card Work?

How Does a Secured Credit Card Work?

Content of the material

  1. How secured cards work
  2. Video
  3. Top myths about ethical credit cards
  4. Myth One: Ethical credit cards don’t offer any benefits
  5. Myth Two: Ethical credit cards are more expensive than regular credit cards
  6. Myth Three: All ethical credit cards are the same
  7. Myth Four: Getting an ethical credit card will save you money
  8. Myth Five: Ethical credit cards are only for people who care about the environment
  9. Myth Six: Ethical credit card companies charge more for their services
  10. Myth Seven: You have to be wealthy to afford an ethical credit card
  11. Myth Eight: Ethical credit cards charge higher interest rates
  12. Myth Nine: Ethical credit cards are not as widely accepted as regular credit cards
  13. Myth Ten: It’s difficult to find an ethical credit card company that meets your needs
  14. What is a secured card, and how do they work?
  15. In Summary: Tips To Improve Your Credit Score
  16. How Does a Secured Credit Card Build Credit History?
  17. Can I get my security deposit back?
  18. Pros and Cons of Secured Credit Cards
  19. Why You Don’t Need to Keep a Balance
  20. How Do Secured Credit Cards Work?
  21. 1. Applying for a Secured Card
  22. 2. Making Your Deposit
  23. 3. Using Your Secured Card
  24. 4. Getting Your Deposit Back
  25. Improving Your Credit
  26. How to build credit with a secured credit card
  27. Find a good secured credit card
  28. Practice good credit card habits
  29. Ask for a product change
  30. Keep the card open
  31. Secured Cards vs. Unsecured Credit Cards, Debit Cards and Prepaid Cards
  32. What’s the Difference Between Secured Cards and Unsecured Cards?
  33. What’s the Difference Between Secured Cards, Prepaid Cards and Debit Cards?
  34. Will Increasing My Secured Credit Card Limit Help My Credit Score?
  35. How to Pick a Secured Credit Card
  36. How Can I Get a Secured Credit Card?
  37. Which secured card is right for you?
  38. Best secured credit cards to build credit
  39. Capital One Platinum Secured Credit Card: Best secured card for building credit
  40. Open Sky® Secured Visa® Credit Card: Best secured card with no minimum credit score requirement
  41. Discover it® Secured Credit Card: Best secured card with cash back rewards
  42. How do secured credit cards help you build credit?

How secured cards work

A secured card is nearly identical to an unsecured card in that you receive a credit limit, can incur interest charges and may even earn rewards. The main difference is you're required to make a deposit (known as a security deposit) in order to receive a line of credit. The amount you deposit usually becomes your credit limit.

Deposits typically start at $200 and can range to upwards of $2,500. If you make a $200 security deposit, you'll receive a $200 credit limit. If you want a bigger credit limit, you'll need to deposit more money.

The amount you deposit acts as collateral if you default on payments, but it's completely refundable in one of two ways: Pay off your balance in full and close your account, or upgrade to an unsecured card.

Secured cards offer many of the same benefits as traditional credit cards, but they are typically easier to qualify for if your credit history is poor or non-existent.

The one big difference, in addition to the required security deposit, is the interest rate. Secured cards usually offer all users one variable interest rate, say 24.99%, for example. Meanwhile, an unsecured card often features a range, say 13.99% to 24.99%. In most cases, the better your credit score the lower APR you'll receive. Since secured cards often only have one, relatively high APR, it's extremely important you always pay on time and in full to avoid interest charges.

Video

Top myths about ethical credit cards

Myth One: Ethical credit cards don’t offer any benefits

This first myth is definitely not true!In fact, many ethical credit cards come with various perks and benefits. For example, some cards offer cash back, while others provide rewards points that can be used for travel or merchandise. So, if you are looking for a card with some extra perks, an ethical credit card is definitely a good option.

Myth Two: Ethical credit cards are more expensive than regular credit cards

This myth is also false. In fact, many ethical credit cards have lower interest rates and annual fees than regular credit cards. So, if you are looking for a more affordable option, an ethical card is worth considering.

Myth Three: All ethical credit cards are the same

This is definitely not true. There are various ethical credit cards on the market, and each one has its own unique set of benefits and features. So, it is important to do your research before you decide which card is right for you.

Myth Four: Getting an ethical credit card will save you money

This may or may not be true, depending on the specific card that you choose. Some ethical credit cards offer great savings opportunities, while others do not. So, it is important to compare the different cards and find one that offers the best deal for you.

Myth Five: Ethical credit cards are only for people who care about the environment

While it is true that many ethical credit cards come with eco-friendly features, this does not mean that they are only for people who care about the environment. In fact, there are a variety of different ethical cards that cater to a variety of different interests and needs. So, no matter what your priorities are, you should be able to find an ethical credit card that suits you.

Myth Six: Ethical credit card companies charge more for their services

This is another myth that is just not true.In fact, many ethical credit card companies actually have lower rates and fees than traditional credit card companies. So, if you are looking for a more affordable option, an ethical credit card company is definitely the way to go.

Myth Seven: You have to be wealthy to afford an ethical credit card

False! There are a variety of different ethical credit cards that cater to a variety of different budgets. So, no matter what your income level is, you should be able to find an ethical card that fits your needs.

Myth Eight: Ethical credit cards charge higher interest rates

Actually, no. Ethical credit cards often have lower interest rates because they are more sustainable for people and the planet. They also don’t have hidden fees, which means you’ll save money in the long run.When you use an ethical credit card, you support businesses that align with your values. You can feel good knowing that your purchases contribute to a better world.

Myth Nine: Ethical credit cards are not as widely accepted as regular credit cards

This is another myth that is just not true. In fact, many ethical credit cards are accepted at a wide variety of different stores and businesses. So, you should have no trouble using your card at the places that you usually shop.

Myth Ten: It’s difficult to find an ethical credit card company that meets your needs

Actually, this could not be further from the truth. There are several different ethical credit card companies to choose from, and each one offers its own unique set of benefits. You’re sure to find one that meets your specific needs.

What is a secured card, and how do they work?

A secured credit card is a type of bank account that requires an initial deposit. The deposit is usually the same as your credit limit and is kept in a secured savings account. If your account is in good standing, the deposit is typically refunded to you.While the funds are not immediately available, they earn interest while being held by the bank, making a secured credit card similar to prepaid debit cards. Having one or more secured cards on file, on the other hand, will help build your credit score over time, unlike many other types of prepaid accounts.Secured cards can be very beneficial to people with no credit history because they are easy to obtain and allow you to access funds while also helping your credit score grow. Small deposits are also easier to manage than larger loans for those who don’t have a lot of money to spare. This makes it easier for people with bad credit to improve their credit and get approved for unsecured credit cards in the future.If your goal is simply to open one or more secured card accounts, you may notice an immediate benefit from having access to extra funds and using them responsibly. The next step is to use the cards carefully and pay your bills on time each month.The better you are at making payments on time, the better your overall credit rating will improve. If you are eventually approved for an unsecured card, your credit score will benefit from the positive payment history associated with each secured account.The benefits of having a secured credit card: 
  • Secured credit cards are a great way to build your credit
  • With a secured card, you can get cash advances and purchase items with the card
  • You don’t need good or excellent credit to get approved for a secured card
  • If you make your monthly payments on time, this will show up as an increase in your credit score over time
  • Secured credit cards can be an easy way for young adults or college students to start building their credit. 
Secured cards can help you establish a good payment pattern, which will reflect positively on your score. Secured cards are great because they’re easier to qualify for than unsecured ones, and they don’t require a credit check.

In Summary: Tips To Improve Your Credit Score

  1. Signup for Credit Karma, an easy-to-use and transparent one-stop shop: get your credit score, credit report, and credit monitoring.
  2. Download Tally, a credit card consolidation app that makes it easy to stay on top of your credit cards. Scan your cards and get a line of credit as well as manage payments.
  3. Signup for Experian Boost to include your cell phone and utility payments into the calculation of your credit score. This is huge because Experian won’t count missed bills, only positive history payments. 
  4. Get a Petal Visa Credit Card. All the perks and rewards of a credit card, except no fees and catered towards improving your credit score. 

How Does a Secured Credit Card Build Credit History?

The most important factors in building your credit score are your credit utilization and your payment history. Other factors include the length of credit history, types of credit used and new credit. By using a secured credit card on a regular basis and making your payments on time every month, you’ll establish credit history due to your payment history.

Another key factor in building credit is keeping your card balance low. Keeping your balance low will show creditors that you don’t need to rely strictly on your credit cards. A good credit score rule of thumb is to use less than 30% of your credit line each month to show you’re a responsible credit card holder.

Can I get my security deposit back?

Many issuers only allow you to get your security deposit back when you close your account. And you’ll likely only be eligible for a full deposit refund if your account is completely paid off. If you default on your account, the credit card company may use your security deposit to pay off the balance.

But a few issuers have programs that allow you to “graduate” from a secured card to an unsecured card — returning your original security deposit in the process. If this happens, it’s generally after a period of demonstrating an ability to pay your bills on time and in full.

Pros and Cons of Secured Credit Cards

Pros
  • Typically reported to credit bureaus.

  • Can help you establish or re-establish credit.

  • Your security deposit is only used if you default.

  • You may be able to earn rewards.

  • Easier to get approved

Cons It can be difficult to come up with the security deposit. There may be other fees such as a maintenance fee and annual fee. You may pay a higher interest rate.

Why You Don’t Need to Keep a Balance

As long as you use the card frequently, it is not necessary to carry a balance over from one billing cycle to the next. Paying off the balance right away not only ensures that you won’t get stuck paying interest, but it also keeps your credit utilization rate, or amount of available credit you’re using, low.

Your utilization rate, or balance-to-limit ratio, is the second most important factor in credit scores after payment history. The lower your utilization, the better, as it shows you’re not relying too heavily on your available credit. By making all your payments on time and keeping your balances low, you are working toward building a positive credit history. With time, the lender may be willing to convert your secured account to a regular unsecured credit card.

How Do Secured Credit Cards Work?

Secured cards work differently depending on which credit card company issues them. But here’s how getting and using a secured card could work if you decide one’s right for you:

1. Applying for a Secured Card

As with any credit card, getting approved for a secured card isn’t guaranteed. Each credit card company has its own policies and secured credit card requirements. Aside from a security deposit, there may be additional approval requirements. 

It may help to learn more about how to apply for a credit card. You could also check whether you’re pre-approved for a Capital One card. It’s quick and secure—and checking won’t hurt your credit score.

2. Making Your Deposit

The amount you pay as a security deposit can vary. A security deposit may be the same amount as your line of credit. For example, a $200 deposit might give you a $200 credit limit. 

On the other hand, some cards—like the Capital One Platinum Secured card—might provide a credit limit that’s higher than the amount of the security deposit. For example, a $200 credit limit might only require a $99 security deposit.

Some card issuers allow you to fund your deposit over a period of time. Others may require that it all be paid upfront.

3. Using Your Secured Card

Once you’ve been approved for a secured credit card and made your deposit, you can use the card to make purchases in person or online—just like a traditional, unsecured credit card. Many secured cards look like traditional cards. So chances are no one but you will know you’re using a secured card.

Part of using a secured card is keeping track of spending and paying your statement on time every month. Reading up on how statement balances and payment options work can help prepare you to keep up with your monthly bills.

4. Getting Your Deposit Back

Deposits are usually refundable. But credit card issuers each have their own policies about when and how refunds are given.

Capital One refunds security deposits in two ways: You can earn back your deposit as a statement credit by using your card responsibly. Or it will be refunded when you close your account and pay your balance in full.

Improving Your Credit

Just like an unsecured credit card, you have to use a secured card wisely. Stay on top of things and make your payments before the monthly due date. If you’re working on improving your credit score, don’t be late or miss making any payments, since your payment history accounts for more than a third of your credit score. Make purchases, but be careful about how much you charge on the card each month. After all, you’re trying to show future creditors that you can manage credit.

How to build credit with a secured credit card

Whether you’re starting to build your credit from scratch or, like myself, trying to fix it after a series of credit mistakes, a secured credit card can offer help.

Here’s what you can do to use it for your credit’s benefit.

Find a good secured credit card

Like any type of credit card, secured credit cards aren’t created equal. Pay attention to terms and fees. There’s no reason for a secured card to charge an annual fee, and some cards will also try to push hidden fees on you. Look for a card that will cost you only a security deposit.

My personal favorite secured credit card is the Discover it® Secured Credit Card. It’s the unicorn of secured cards since it offers cash back rewards: 2% back at gas stations and restaurants (up to $1,000 in purchases per quarter) and 1% on everything else. All the cash back you earn in the first year with the card also gets matched.

Practice good credit card habits

A secured card offers a chance to demonstrate responsible credit behavior. Do so by always paying on time and using less than 30% of your credit line for good credit utilization. For example, if your credit limit is $300, avoid having a card balance over $90 at any time. Paying in full multiple times a month can help you keep your balance under control.

The best practice is never to let the balance roll over to the next month. Not only will this ensure good credit utilization, it will also allow you to avoid expensive interest charges and credit card debt.

Ask for a product change

After your credit score has increased, it may be a good idea to call the issuer and ask for a product change. The issuer may be willing to upgrade you to an unsecured version of the card or a different card altogether. It may be possible even if your credit isn’t good yet, but you’ve been consistently showing good credit behavior for a year or two. Issuer loyalty often pays off.

Keep the card open

Even if you haven’t graduated on to a better card, keep your secured card open after it’s done its job. You may have more exciting cards now – and your credit may be good or excellent – but don’t give up on your old secured card (unless it charges fees). You can use it for minor charges, like your Netflix subscription, to keep it active.

Closing a credit card isn’t good for your credit, since it could negatively impact your credit utilization and lower the average age of your accounts. I’d suggest waiting a few years before closing your old card to soften the blow.

Secured Cards vs. Unsecured Credit Cards, Debit Cards and Prepaid Cards

When you pay for something, secured cards and other cards may seem the same. But there are some differences worth noting.

What’s the Difference Between Secured Cards and Unsecured Cards?

Secured cards and unsecured credit cards work similarly. The biggest difference between a secured and unsecured credit card is the security deposit. But rewards like cash back, miles or points may also be limited with secured cards.

Credit limits may differ, too. With a secured card, your credit limit may be based on the security deposit. But some secured cards offer opportunities to increase your credit limit. At Capital One, you could be automatically considered for a higher credit line in as little as six months.

What’s the Difference Between Secured Cards, Prepaid Cards and Debit Cards?

One big difference is that debit and prepaid cards may not be able to help you build credit. That’s because activity on those accounts isn’t usually reported to credit bureaus, according to the Consumer Financial Protection Bureau. Prepaid cards may also lack many of the security features of a credit or debit card.

Another primary difference between secured cards, debit cards and prepaid cards is where the funds used to pay for things come from. Prepaid cards are usually loaded with money ahead of time, and a debit card is usually linked to a checking account. But a secured card functions differently: The credit card company provides funding that you then pay back each month.

Will Increasing My Secured Credit Card Limit Help My Credit Score?

In most cases yes, credit limit increases will help increase your credit score. 

This, however, only works if you don’t use that increased credit limit as a reason to increase your spending. 

See, your credit limits are an important factor in calculating the credit utilization part of your score. This is done by adding up all of the balances on your revolving credit lines and dividing them by the total credit limits. 

To keep the example simple, let”s say you only have one revolving account (your secured card) with a $500 limit and a $200 reported credit card balance. This gives you a credit utilization rate of 40%, which means you are currently using 40% of your available credit. 

Now, if you raised the limit on that card to $1000, then your credit utilization rate drops to 20%. This is great news for your credit score since a lower utilization rate equals a higher score. 

Before raising your credit limit, you should first check with the card issuer to make sure that there is not a hard pull of your credit involved. 

Also Read: Secured vs. Unsecured Credit Cards

How to Pick a Secured Credit Card

  • Strive to avoid annual fees. While some secured credit cards charge an annual fee, we suggest looking at a secured card that doesn’t charge any fees first, like most of the cards listed above. Any upfront fees you have to pay will eat away at your initial credit limit bank deposit and force you to start your credit building journey with less money on your credit line.
  • Check minimum deposit amounts. Also check for minimum deposit amounts since some cards let you get started with a smaller collateral deposit upfront. A small upfront deposit could be important if you don’t have much spare cash around.
  • Make sure any card you’re considering reports to the three credit bureaus. The value in obtaining a secured credit card should be building credit, which is why making sure your card reports your credit movements to the three credit bureau agencies is so important. Every card on this list reports your payments and balances to the credit bureaus, so make sure to start your search with cards we’ve profiled.
  • Check for fees and read the fine print. Also make sure to check for fees and especially hidden fees in the fine print. Some secured credit cards charge an application fee and an annual fee, and many charge a monthly maintenance fee. The cards on this list are free of hidden fees, which is why we chose them.

How Can I Get a Secured Credit Card?

The process for obtaining a secured credit card varies, so you’ll want to contact your financial institution to ask about their process. To obtain a secured credit card through Navy Federal, the process is simple. First, open a qualifying Navy Federal savings account if you haven’t done so already. Then, make a deposit of at least $200 into your savings account. Finally, submit your application for a secured credit card. Once approved, you’ll be issued a card with a credit limit equal to your deposit.

More good news—with Navy Federal’s nRewards® Secured credit card, you’ll enjoy a low interest rate and no annual, balance transfer or foreign transaction fees. You’ll even earn interest on your initial security deposit. Plus, Navy Federal’s secured credit card goes the extra mile: for every dollar you spend using the card, you’ll earn one rewards point that you can redeem later for cash back, gift cards or merchandise. Most importantly, Navy Federal reports all major activity to the credit bureaus, allowing you to build your credit history.

Which secured card is right for you?

There are a few things to consider when choosing a secured credit card: how much is the required deposit, how do you transition to an unsecured card (more on that below) and can you earn rewards?

One strong secured card option is the Discover it® Secured Credit Card, which requires a $200 deposit but comes with some good perks. You can earn rewards (2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter, then 1%, and unlimited 1% cash back on all other purchases automatically), there's no foreign transaction fees and there's no annual fee.

If you're looking for a card that requires a smaller deposit, you might want to consider the Capital One Platinum Secured Credit Card. If you qualify for the low $49 or $99 deposits, you'll still receive a $200 credit limit.

Best secured credit cards to build credit

What’s the best secured credit card to build credit? It depends on what you’re hoping your secured credit card can do for you. Do you want to earn rewards on every purchase? Are you looking for a credit card that has no minimum credit score requirement? Would you like your account to be automatically reviewed for a higher credit limit?

You should also make sure that any secured credit card you choose allows you to put down a security deposit you can afford—because there’s no good reason to go into debt to take out a secured credit card.

Which secured credit card is right for you? Take a look at our complete list of best secured credit cards to learn more about what’s available. We’ve highlighted a few of our favorites below:

Capital One Platinum Secured Credit Card: Best secured card for building credit

Want to keep your security deposit as low as possible? The Capital One Platinum Secured Credit Card lets you establish a line of credit with a deposit as low as $49. Your credit limit is likely to be very low, compared to other secured cards—but you don’t need a lot of credit to build your credit score. You just need to use the credit you have responsibly, and Capital One’s CreditWise® app can help you learn how your day-to-day spending decisions affect your credit score. After six months, Capital One reviews your account to evaluate your qualifications for a higher credit limit.

Open Sky® Secured Visa® Credit Card: Best secured card with no minimum credit score requirement

Some credit card issuers will turn people down for secured cards if their credit scores are too low. The Open Sky® Secured Visa® Credit Card has no minimum score requirement, making it an excellent card for people with no credit or very poor credit. In addition to putting down a security deposit of at least $200, you’ll need to pay an annual fee of $35 to access this card—so keep that in mind before you apply.

Discover it® Secured Credit Card: Best secured card with cash back rewards

Want to earn rewards as you build your credit? The Discover it® Secured Credit Card offers 2 percent cash back on gas stations and restaurants (for up to $1,000 in combined spending per quarter, then 1 percent) and 1 percent on all other purchases. New cardholders can take advantage of Discover’s Cashback Match program, which matches all of the cash back you earn during your first year. Like the Open Sky Secured Visa, you need a minimum $200 security deposit to access this card—but you won’t have to pay an annual fee, and you’ll earn cash back on everything you buy.

How do secured credit cards help you build credit?

Card issuers report your payment history and credit utilization to the credit bureaus. Paying on time and keeping a low balance on your card can improve your credit score. The key to using a secured credit card to build credit is to use it responsibly.

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