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Not everyone can qualify for top-of-the-line credit cards with rich rewards, high limits or super-low interest rates. If you've been turned down because of bad credit or no credit, a secured credit card is probably your best option. These cards require a security deposit, which makes them easier to get.
To understand what's important when choosing a secured credit card, keep in mind what a secured card is for: building credit. You shouldn't expect to finance a round-the-world trip or a big-screen TV with a secured card. Plan to use it to make small purchases and pay them off each month. The goal is to improve your credit so you can qualify for better cards down the road.
A secured card might be your first card, but hopefully, it won't be your last. You won't get everything you want, but you should get what you need. Here are five things to look for when picking a secured card — and two things not to worry about.
1. Credit bureau reporting
If you're trying to improve your credit, then the payments you make must be reported to credit bureaus, the companies that compile the credit reports used for credit scoring. There are three major credit bureaus: TransUnion, Experian and Equifax. Ideally, the card you get will report your account activity to all three (most cards do), but two is better than nothing.
A credit card that doesn't report account activity to the credit bureaus is not a card worth having. This is the one dealbreaker if you want to build your credit.
Don't be confused by a credit card that advertises "no credit check." A credit check is different from credit reporting. In a credit check, the credit card company looks at your credit history as part of the application process. Credit reporting comes after you get the card when the company sends information about your account to the credit bureaus. Even a card that doesn't require a credit check should still do credit reporting.
2. A deposit you can afford
The security deposit is what makes a secured credit card an option for people with bad or no credit. You pay an amount of money when you open the account, and the card issuer holds that money as collateral. Your credit limit is typically equal to your security deposit, so you can't charge more on the card than you've deposited. When you upgrade your account or close it in good standing, you get your deposit back.
Most secured cards require a minimum deposit of $200 or $300. You can deposit more money to get a higher limit. For the maximum benefit to your credit score, it's generally a good idea to keep your balance below 30% of your limit. Staying below 10% is even better, so a deposit larger than the minimum can give you a little more breathing room. If you have extra money available, the maximum deposit amount might be as much a consideration as the minimum when choosing a secured card. And, if you don't, consider saving up for a secured credit card deposit.
Some secured credit cards require you to make your deposit immediately upon approval, while others give you a little time to get the money together. Failing to fund the deposit in time can result in your application status being moved from approved to rejected, so having the money in hand when you apply is your best bet.
3. Reasonable fees
Many of the best secured credit cards don't charge an annual fee. If you're going to pay a fee, you ought to get something for it, such as a lower interest rate or the ability to qualify without a credit check. As a rule of thumb, the annual fee on the secured card you choose shouldn't be higher than $50.
With a good secured card, the annual fee should be the only unavoidable fee. Don't go for cards that charge a fee to apply or for "processing" before you open your account. Some cards have monthly "maintenance" fees or tack on an extra charge every time you use your card or pay your bill online. These cards aren't designed to help you build credit; they're designed to bleed you dry. Just because you have bad credit doesn't mean you deserve a bad credit card.
If you're using your card responsibly, you shouldn't be paying late or getting cash advances, actions that typically incur fees.
Several issuers specialize in unsecured cards for people with bad credit. These cards don't require a security deposit, but generally, they charge extremely high fees, including annual fees as high as $99 and a raft of other charges. These fees quickly add up to more than a typical secured card deposit, and unlike a deposit, you can't get this money back. A 2017 NerdWallet study found that secured cards cost an average of $26 in fees the first year, and $19 in subsequent years. Unsecured credit cards for people with low credit scores can cost about $150 more in fees each year.
4. A path to upgrade
A secured credit card should not be a long-term proposition. Use it to build your credit, then get a better card.
Some of the top secured credit cards come from issuers that also offer products for good or excellent credit. When you've improved your credit enough, you can upgrade your account to an unsecured card and get your deposit back. Upgrading allows you to keep your same account but with a new card attached to it. That can help your credit because the age of your accounts is a factor in your credit scores.
A few credit card companies have an automatic upgrade process. The Discover it® Secured Credit Card, for example, begins reviewing your account after seven months for possible upgrade to an unsecured Discover card. With other card issuers, however, it's on you to request an upgrade. The rules on qualifying for an upgrade can be vague, so keep an eye on your credit score. And don't be afraid to call customer service and ask whether you're on track.
Finally, some secured cards come from issuers that specialize in consumers with less-than-good credit. As a result, they might not have good unsecured products for your upgrade. With these issuers, you'll have to close your account to get your deposit back or leave it open for a while and consider it an investment in your credit score. The lack of an upgrade option doesn't mean you should never pick a secured credit card from that issuer. You'll just need to understand that your upgrade path will take you elsewhere.
5. A grace period
Grace periods are standard on most credit cards, but sometimes cards for people with bad credit don't have them. Make sure yours does.
Obvious question: What's a grace period?
If you roll over a balance on your credit card from one month to the next — that is, if you don't pay the full balance shown on your statement — then you'll be charged interest on all purchases as soon as they hit your statement. However, if you pay your statement balance in full, then no interest will be charged on new purchases until after your next statement's due date. That interest-free period is the grace period.
To put it in simpler terms, if you pay your credit card balance in full and on time every month, you shouldn't have to pay any credit card interest. Having a grace period is important because the interest rates on secured credit cards are typically high.
To be sure that the secured card you choose offers a grace period, look on the issuer's website for the chart of rates and fees known as the Schumer box. Look for a section titled something like "Paying interest" or "How to avoid paying interest on purchases." If your card offers a grace period, this section will say that you will not be charged interest if you paid your previous balance in full.
Two things not to get worked up about
When you're selecting a secured credit card to build or rebuild your credit in the short term, you have different needs from someone with excellent credit looking for a card to use long term. Two of the most important considerations for people with excellent credit are the card's ongoing interest rate and the rewards earned by the card. Here's why these factors aren't as critical with secured cards.
Interest rates, or APRs, for secured credit cards are often well over 20%. But if you're using the card as directed — making small purchases and paying them off in full every month — your grace period will be in effect and your APR will be irrelevant. Again, a secured card is a tool for building credit, not for carrying debt. If you expect to carry a balance every month, it might be worth examining what you want a secured card for. Spending more than you can afford is not a recipe for rebuilding credit.
Nevertheless, there are secured cards that offer super-low interest rates, but be prepared to pay an annual fee for them.
A few secured credit cards offer rewards. Getting a little something back for your spending is better than nothing, but it's unlikely to amount to much when you consider the low credit limits of secured cards and the credit-score value of using only a small percentage of your limit.
Suppose you have a secured card with a $300 limit that pays 1% cash back on your spending. Keeping your balance below 30% of your limit means spending no more than $90 a month. That's 90 cents in rewards. Do that for a year, and it's only $10.80. That's real money, of course, but you're not missing out on a big windfall when you have a secured card without rewards.
Getting a secured credit card and using it responsibly is one of the quickest and easiest ways to build credit. But the secured card you choose should help speed you on your way to better credit, not be an obstacle.
» More: 8 ways to build credit fast