by Lyle Daly | Sept. 1, 2020
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If you're going to open a secured credit card, you'll need to know how much to put down.
Consumers need to put down a security deposit in order to get a secured credit card. This deposit is usually your starting credit limit, and it's also the reason why secured credit cards are available to consumers who have poor credit. If you default on your bill, the card issuer is safe because it can take that money from your deposit.
Many of the best secured credit cards let you choose a deposit amount within a set range, such as $200 to $5,000. That choice is easy when you only have enough saved for the minimum end of that range, but is it worth paying more if you can? To decide how much you should deposit on a secured credit card, it's important to understand the pros and cons of both options.
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The main argument for making a larger deposit is convenience. When you deposit more, you'll have more credit, and you won't need to micromanage your credit card.
Let's say you go with a smaller deposit of $200. You spend $100 in one trip to the grocery store. You've already used 50% of your available credit, and your card will get declined if your next purchase is for, say, $125. If you want to use your credit card regularly, you'll probably need to make several payments to your card issuer every month. That's a hassle you wouldn't have if you'd deposited a greater amount, such as $1,000.
When you have a low credit limit, it can also impact your credit score. This is because of a factor called your credit utilization ratio, or your credit card balances compared to your total credit limit. Credit utilization is one of the most important factors in your credit score. It's best to keep this under 20%, or 30% at most. If your credit utilization is 50%, like in the example above, that would have a negative effect on your credit score.
To be fair, credit utilization is a factor you can improve very quickly. Only your most recent credit utilization is important. So if your current reported credit utilization is 20% or below, that will be a positive factor for your credit. It won't matter if your credit utilization used to be 50%, 75%, or 100%. Note that even though this means you can carry a small balance without hurting your credit, it's still better to pay off your entire balance by the due date so you don't get charged any interest.
The problem with putting down a large deposit on a secured credit card is that there are much better things you could do with your money. Deposits on secured cards almost never earn interest. Your money will basically be sitting around until you're either able to graduate to one of the card issuer's unsecured cards or you close your secured card. After either of those happen, the card issuer will refund your deposit, assuming your account is in good standing.
It doesn't make sense to have thousands of dollars earning nothing when there are high-yield savings accounts that offer competitive interest rates, risk-free. And keeping your money in the bank means it's also easier to access. That could be important if you find yourself in a situation where you need more cash. If your car breaks down, you don't want to put yourself in a situation where your only option is to cancel your secured credit card to get your deposit back ASAP.
You won't have the convenience of a larger credit limit, but that's easy enough to manage. Just use your secured credit card for one or two small purchases per month and pay the bill in full. You'll increase your credit score this way which, after all, is the goal with a secured card.
It's best from a financial perspective to deposit the minimum amount for a secured credit card. You'll be able to open a credit card and build your credit, without having too much of your money tied up in the deposit.
If you really want to have a higher credit limit, then you could deposit more. However, you should only do this if you also have at least three to six months of living expenses in your emergency fund. If not, stick to the minimum and keep your extra money in a bank account in case you need it.
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