What Makes a Good Secured Credit Card?

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On the hunt for a secured credit card? Here are some features you should look for to find a card with favorable terms.Image source: Getty Images.

Secured cards can be a good way to build credit when you have no credit or poor credit and when you can't qualify for a traditional credit card.

These cards require that you put down a deposit. In most cases, your deposit equals the credit limit the card issuer assigns you. But some secured card companies will give you a slightly higher credit line than your deposited amount.

Getting a secured card is easier than getting a traditional card because your deposit reduces the risk to the lender. In fact, you can often get a secured card even with no credit history or a recent bankruptcy.

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Unfortunately, not all secured credit cards are created equal. It's important to find the right card to meet your needs.

What makes a good secured credit card? Here are six key features:

  • A reasonable deposit limit.
  • No annual fee or low annual fee.
  • Reports to the three major credit reporting agencies.
  • The possibility to convert to an unsecured card.
  • Rewards or cash back for using your card.
  • A reasonable APR.

1. A reasonable deposit limit

When signing up for a secured credit card, you have to put money into an account for the credit card issuer to hold onto. Your credit limit is typically equal to the deposited amount.

You have to tie up this money for the entire time you have the secured card, so you don't want to invest a fortune. Look for a secured card with a deposit limit of $200 or less. Yes, your card will have a low limit when your deposit is this small. But you won't be giving the card issuer a bunch of cash that you could potentially use for other things.

There are actually secured cards out there that let you put down a smaller deposit than your total credit line, depending on your credit score. Do you want the highest possible credit line while tying up the minimum amount of cash? Look for one of these cards.

2. No annual fee or a low annual fee

Many secured cards charge high annual fees. That means you're paying money just to build credit.

Fortunately, there are some secured cards with no fees or with fees under $50. Since you have these free options, there's no reason to pay an annual fee. Especially if the card doesn't offer a very generous rewards program to make up for what you're being charged (most secured cards don't have this type of generous rewards program).

3. Reports to the three major credit reporting agencies

The most important reason to get a secured credit card is to improve your credit score and build a solid credit history. But this can only happen if your record of on-time payments makes it to your credit report. That's why it's imperative to check that any secured card issuer you're considering getting a card from reports your payment history to Equifax, Experian, and TransUnion.

Most secured card providers publicize that they report your information to these credit bureaus, which are trusted repositories for info on your credit history. If you're not sure if a card reports to all three, ask the card issuer. Don't apply for the card until you confirm that they do.

4. The possibility to convert to an unsecured card

Some card issuers eventually allow you to convert your secured card to an unsecured card. You get your deposit back and keep your account open.

This is an ideal situation because you won't have to close your secured account or apply for a brand new credit card to graduate to an unsecured card as your credit history improves.

5. Rewards or cash back for using your card

Earning rewards isn't the main reason to get a secured card -- building your credit is. Still, if you can get cash back or points while you're improving your credit score, there's no reason not to take advantage.  

Secured cards don't offer rewards as generous as unsecured cards. But there are some secured cards that do cash back or points. Cash back means you get back a percentage of what you spend. It's typically around 1%. You could get this money credited to you as a statement credit to reduce the balance owed on your card each month. Points, on the other hand, can generally be redeemed for travel or merchandise.

If you want rewards for your spending, look for a card that provides cash back or points.

6. A reasonable APR

The annual percentage rate (APR) is the cost of borrowing on your card. Most secured cards have high APRs. You won't need to worry about this if you don't plan to carry a balance -- and you shouldn't carry a balance on a secured card. You should pay off your card when the statement is due each month to avoid incurring interest costs.

Sometimes, however, you might carry a balance on a secured card, even though it isn't financially smart. If you think this could happen to you, look for a card with a low APR. Otherwise, you could pay a fortune in interest charges.

Research your options for secured cards

When it comes to secured credit cards, you have options -- don't settle for an expensive card with few perks. Shop around to explore offers from secured card providers. Then pick the card with the lowest cost and best rewards for you.

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