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If you have a secured credit card — a credit card that requires cash collateral — you may be looking forward to the day your issuer returns your deposit and you "graduate" to an unsecured account.
Trouble is, many secured credit cards don't transition you to an unsecured card proactively, and the ones that do often lack a clear and understandable process, according to a report on secured cards by the Center for Financial Services Innovation and Visa. Even so, about half (49.5%) of secured cardholders expect to graduate to an unsecured option with their issuer, the report found.
The Center for Financial Services Innovation is an industry group supported by card issuers and others. The report examines market opportunities and trends in the secured card market.
The findings serve as a reminder that your secured card's graduation program isn't a surefire guarantee that you'll get an unsecured card automatically, even if you're staying on top of your payments. But the report also underscores the point that the credit card industry is fiercely competitive: If your issuer doesn't upgrade your card in a timely manner, another issuer may well swoop in with a better offer.
Graduation is a guessing game
NerdWallet looked at 11 secured credit cards highlighted in the 52-page report to see what kinds of graduation programs they offered, if any. Six of them disclosed some type of graduation program — but the issuers' descriptions of these programs were vague and noncommittal. Some examples:
“With responsible use over time, you may be eligible for an upgrade to an unsecured credit card.”
“When you've managed all of your credit obligations responsibly and consistently for 12 months, you'll be well on your way to a stronger credit standing, and we may be able to move you to an unsecured credit card product.”
“After 12 months, your account may be reviewed and you could qualify to have your security deposit returned while you continue to use your card.”
These issuers don't spell out what exactly they assess during an account review or what might disqualify you from an upgrade. And among those cards that disclose graduation programs, only four said when that upgrade might take place — at time frames of eight to 12 months. The report acknowledges that this kind of ambiguity can be frustrating for cardholders.
The issuer "can’t guarantee a credit score increase. They can’t guarantee graduation. And that totally makes sense, because there are so many factors impacting a customer's credit score that are beyond any single provider's control, including the customer's own behavior,” says Rob Levy, managing director of the Center for Financial Services Innovation. “But that then provides a really underwhelming experience for the consumer, because they’re going through a lot to use this product in order to improve their credit score.”
A more transparent, customized graduation process that tells consumers exactly how close they are to graduating would help both issuers and consumers, Levy tells NerdWallet. He adds that if issuers aren't proactive and transparent about this process, they risk losing customers to other banks who are competing for the business. The report notes the progress some issuers have made on this front, identifying areas for improvement for secured cards in general.
"If [issuers] put the same amount of energy and technology behind the secured cards that they’re putting behind their high-end rewards cards, these products could get a lot better a lot sooner," Levy says.
How to move on
Today’s secured card graduation programs leave something to be desired, but it's still possible to transition to the type of card you want. Here's where you can start:
Find a secured card that offers a graduation program. Ideally, the issuer will let you keep your card history under the same account during this transition. If your issuer closes your secured account and opens a different unsecured account, your credit could take a hit. Both the Discover it® Secured and the U.S. Bank Secured Visa let you keep the same account open and simply transition it from secured to unsecured, according to customer service representatives from the issuers.
Ask whether you're on track. A reputable credit card issuer will probably want to help you graduate to an unsecured card. Call your issuer and find out when your account will be reviewed for graduation. A customer service representative might be able to offer more specific guidance about how you could move to an unsecured card faster.
Look for better offers. If you've successfully built or rebuilt your credit, and your issuer isn't helping you transition to an unsecured card, it's time to look elsewhere. Look at unsecured offers, apply for a card that fits your spending habits and credit profile, and cancel your secured account once you’ve been approved for your unsecured card (but not before). Continue making on-time payments and using only a small amount of your available credit.
Waiting for an automatic upgrade may work out. But sometimes it's better to take the initiative and go for exactly what you want.