If you have subpar credit, there are ways to improve your credit rating and bring up your score. The best way is to get a credit card and begin using it responsibly and paying it off quickly. However, suppose you’re denied a card. How do you rebuild your credit when you can’t get new credit?
A secured credit card may be the answer. A secured card is a credit card for which you’ve made a deposit in order to obtain it. This deposit is often the same or more than the credit limit for the card. It allows you to use a card in places that don’t take cash, and it allows you to build or repair your credit.
Just because you can put down a deposit, that doesn’t mean you’ll automatically be approved for the card. Most likely, the issuer will pull your credit report and look for items that disqualify you, such as a bankruptcy. Secured credit cards are generally in use by people with bad credit to help improve their credit standing. As stated though, some issuers shy away from those with serious past delinquencies.
The deposit you make doesn’t go toward paying off purchases; The issuer keeps the money as long as you have the card. If the account is closed by you or the issuer, the issuer will deduct the balance from the deposit, along with any fees it deems appropriate, and refund the rest to you.
A secured card works the same way a regular credit card does, meaning no one will know what type of card it is. However, it’ll show up on our credit report as a secured card. It does have the same effect on your credit score as an unsecured card does though, so you’ll need to use it responsibly. It’s important to pay your bill on time to gain the positive credit benefit.
The Downsides of Secured Credit Cards
There are a few drawbacks to secured credit cards. First off, they usually have a lower credit limit to minimize the risk to the issuer, although this could also be considered a positive thing. Because they have lower credit limits, you won’t rack up big credit card bills, which may prevent you from falling into a cycle of debt that you can’t afford to pay back. Some do offer higher limits after you’ve proven your creditworthiness, while others may even offer to return a portion of your deposit after you’ve proven you’re not a major risk.
Unfortunately, most have high-interest rates, and some have application fees and other fees that can make using them very costly. Some secured cards even require you to purchase insurance as part of your contract. Most will have an annual fee to pay. All these factors vary greatly, so it pays to shop around for the secured card with the friendliest terms for your needs.
Secured cards also don’t come with the kinds of rewards that unsecured cards offer, such as airline miles or cash-back options.
The main thing to be wary of is that some secured cards don’t report your data to the credit bureaus. Before you sign up, try to verify that your standing and history will be reported. It’s the whole point of getting a secured card in the first place!
Who Should Use a Secured Credit Card?
While they’re great for fixing bad credit, they’re also a great way for certain folks to build credit.
College students
If you’re a student and looking to get a jump on building your credit, a secured credit card is a good choice if you have no credit history. Once you’ve graduated, potential employers may want to check your credit. Already having good credit shows that you’re responsible, and it may help you land the job.
You also may need a car. A secured card that you’ve been using and making on-time payments on may help you get an auto loan at a lower rate.
It may help you get an apartment as well. More and more rental properties require your credit report as part of their application process, so having a good credit history could help you get your first apartment.
People under 18 years old
It’s never too early to start building a good credit history! If you’re under 18, you’ll need a cosigner, but that cosigner is protected because if you don’t pay, any unpaid balance would come from the deposit.
Foreign citizens residing in the United States
People who are new to the States may wish to establish credit as they build their lives here.
People who’ve gone through a divorce
If you got married right out of school, you may have built your credit history with your spouse. If your credit history together was subpar, you need to build your own positive credit profile, and a secured card is a good first step.
Secured credit cards can be an effective way to build your credit or fix it as long as you’re using them responsibly and paying them off quickly. To do this, only make purchases that you’ll be able to pay off quickly. This will create a record of good, responsible credit usage; before long, you’ll be able to apply for and obtain an unsecured credit card that won’t require a deposit, has a lower interest rate, has a higher credit limit, and will give you those reward benefits.