A secured credit card can be an excellent tool to build your credit, especially if you cannot get approved for a traditional credit card. Similar to a traditional credit card, a secured card requires the cardholder to put up a cash deposit in exchange for a line of credit.
Once you pay the deposit and receive your card, you can use your secured card just as you would use a traditional credit card. You'll get similar benefits, such as fraud protection and the ability to earn rewards in some cases. Perhaps most importantly, a secured card will report to the three major credit bureaus and help you build your credit over time.
In order to determine which secured credit card is the right fit, you need to consider both costs and convenience.
The most important factor you need to consider is how much the secured card you choose will cost. There are several potential costs to be aware of, including:
- Interest rates: In general, the interest rate you can expect should be comparable to the higher end of what you would get from a standard, unsecured credit card. Currently, secured credit card offerings from some of the largest U.S. banks come with interest rates ranging from 18.99% to 22.99%, and these are variable, meaning they will change over time depending on the prevailing interest rates.
- Annual fees: You'll probably have to pay an annual fee for your secured credit card, but it shouldn't be any more than $50. Currently, the highest annual fee for a secured card with one of the big banks is $39.
- Other costs: You should not have to pay an application fee or any additional monthly charges to obtain a secured credit card. If a card issuer wants you to pay anything besides a reasonable annual fee, move on.
Other things to consider
In addition to the costs, there are a few other things you need to keep in mind regarding secured credit cards.
- Credit line: Secured card issuers have minimum and maximum credit lines, and these can vary considerably. So if you want to deposit the bare minimum, it's worth shopping around. Some banks require only a $200 minimum deposit, while others want $300 or even $500 to open an account. On the flip side, there may be a maximum allowable deposit, which can widely vary (e.g., $3,000 to $10,000).
- Convenience: If you have a checking or savings account, check with your bank to see whether it offers a secured credit card. You may be able to use your new card for overdraft protection and link your accounts to make payments easier.
- Opportunities: The most common reason consumers get a secured credit card is to establish or reestablish credit over time. So, if your eventual goal is to obtain an unsecured credit card, make sure there is an opportunity to obtain one without the hassle of canceling your account and reapplying elsewhere.
The ideal scenario is to go with a lender that rewards your good behavior. For example, if a lender will refund your security deposit after 12 months of on-time payments and responsible credit use, or increase your unsecured credit limit after you've established a solid history, it will limit the amount of time your money is tied up.
A final thought
Many secured card issuers offer very similar products, but don't underestimate the small differences, especially in terms of convenience and future opportunity. In fact, it may even make sense to accept a slightly higher annual fee to obtain a card that has an easy transition to an unsecured card or has a quick and straightforward procedure for getting your deposit back.