Not everyone can qualify for the top-of-the-line rewards credit cards. If you’ve been turned down because of your credit scores, you have other choices. One is to build credit using a secured credit card.
Secured cards make up less than 1% of the credit card market, but they help build credit in much the same way unsecured cards do. To get one, you’ll need to make a cash deposit — generally it will be equal to or less than the card’s credit limit.
A secured card can be better than an unsecured one if you have low credit scores, but there are drawbacks. Keep these pros and cons in mind when considering a secured credit card.
Secured card benefits
Low fees: A recent NerdWallet study found that secured cards cost an average of $26 in fees during 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, such as ones for applying, processing and maintenance.
These estimates apply only if you pay off your balance each month — any credit card becomes more expensive if you incur interest charges. We recommend using a credit card only if you can pay the full balance by the due date. Credit cards are effective tools for building credit, but not if your balance becomes too large to manage.
Easier approval than most desirable unsecured cards: There are plenty of appealing unsecured credit cards, but most are available only to those with good or excellent credit. If your credit needs work, your options are limited.
Because each secured card is backed by a cash deposit, they’re easier to get, even if you have bad or no credit. Your lender can keep the money if you fail to make payments on your credit card bill.
Refundable deposits: If you’ve paid off your balance completely and haven’t made any late payments by the time you close your secured card account, you’ll receive your deposit back. Always pay your bill by the due date — payment history is the biggest factor in most credit scores.
Ask your issuer if you can graduate from a secured card to an unsecured card once you’ve built up your credit. This won’t affect your ability to get your deposit back.
Secured card drawbacks
Upfront deposits: Secured card deposits tend to be around a few hundred dollars, which might be a deal breaker for some potential cardholders. According to the Federal Reserve, almost half of U.S. adults say they don’t have $400 on hand to cover an emergency expense, so it may be challenging to save up the cash for a nonemergency expense like a card deposit.
The deposit on a secured card is refundable, but you’ll still have to part with it temporarily. Unsecured credit cards don’t require a deposit.
Low credit limits: Secured cards tend to have credit limits between $300 and $500, though the issuer may increase yours with time. And you’ll want to use less than 30% of your limit at any given time to optimize the credit utilization piece of your credit scores. So if your credit card limit is $500, you’ll want to keep your balance below $150.
But unsecured cards marketed to those with bad credit also tend to have low limits, so you probably aren’t missing out on too much by opting for a secured credit card instead.
If you can afford the cash deposit, a secured card can be useful. They’re relatively easy to get, and with the right money moves, you can use one to build credit — and eventually move on to an unsecured credit card.
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