Secured Credit Cards

How to Choose a Secured Credit Card

Credit cards are a necessity these days. But qualifying for one isn't easy - you need a good credit history to get approved. So what if you're just starting to build credit history or have had credit issues in the past?

In this case, you may want to look into getting a secured credit card.

Here is how it works: to open an account, you need to put down a security deposit. This reduces risk to the lender in case you don't make your payments. In exchange, you'll get a credit card with a credit limit, usually the amount of your deposit. You can then use your secured credit card to make purchases as normal and pay off the bills as normal. But if you don't make payments, the lender can choose to withdraw from your deposit to cover the defaulted amount.

Build Your Credit

A secured credit card is a good way to build or rebuild your credit history, until you can qualify for an unsecured credit card. With a secured credit card, if you have no outstanding balance and are in good standing, you can get your security deposit back when you close your account.

Here are some questions to consider when you’re examining your options for a secured credit card:

• Does the card report to credit bureaus? To improve or establish your credit history – which is the main reason to get a secured credit card in the first place – you need a card that reports timely payments to credit bureaus.

• How much do I need to deposit? In return for the use of the secured credit card, you have to set aside money in a bank account that the credit card company can tap if you default on your payments. Usually, the size of that deposit determines your credit limit. A few cards may give you a credit limit of up to 150% of your deposit amount, which means you can spend more than the amount you have deposited. Others may actually give you a credit limit below your deposit amount. The standard is 100%, meaning, most likely, your credit limit will be exactly equal to the amount you deposit.

• How much does it cost? Consider both the card’s annual fee and the interest rates. Usually, if the annual fee is low, the interest rate is higher. If you can pay off your balance in full each month, go for a card with a lower (or no) annual fee. But if you carry a balance, then it's worthwhile to look for a secured credit card with a lower interest rate.

Secured Credit Cards

Do you want no annual fee and cashback rewards?
Discover it Secured Card reports to the 3 major credit bureaus to help you build or rebuild credit with responsible use. This secured credit card's variable APR is 25.24%. The minimum refundable security deposit is $200 (up to the amount Discover approves) and your credit line equals your deposit. Starting at 8 months, Discover will perform automatic monthly reviews based on your responsible credit management across all your credit cards and loans to see if you could qualify to transition to an unsecured line of credit. You will see your FICO credit score for free on your monthly statement and in your online account. There is no annual fee.

But here's where it gets interesting. Discover it® Secured credit card offers rewards: 2% cash back at gas stations and restaurants (on up to $1,000 in combined purchases each quarter); 1% cash back on other purchases. As a promotion for new cardmembers, Discover will match all the cash back you've earned at the end of your first year.

But watch out, the interest rate is high, so consider this card if you can pay off your balance in full each month.

Do you want no annual fee and a higher credit limit with a lower deposit?
Capital One Secured Card reports to the 3 major credit bureaus to help you build credit when used responsibly. This secured credit card's variable APR is 26.99%. You can receive an initial $200 credit line with a security deposit of $49, $99 or $200, depending on your creditworthiness. And if you make your first 5 monthly payments on time, you can get access to a higher credit line with no additional deposit. There is no annual fee.

But watch out, the interest rate is high, so even if you may get a higher credit limit with less security deposit, it's best to be able to pay off your bills in full each month.

Do you need to carry a balance from time to time?
First Progress Platinum Secured MasterCard reports to all 3 major credit bureaus to help establish your credit history. No minimum credit score is required for approval. This secured credit card's variable APR is 10.49%. The credit line is secured by a fully-refundable deposit of $200 - $2,000 submitted with application. Just pay off your balance and receive your deposit back at any time. There is a $49 annual fee.

This card has a low APR but it has an annual fee. If you tend to carry a balance, this card has the potential to save money overall by having a lower interest rate.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any card issuer. This site may be compensated through the Advertiser's affiliate programs.

Disclaimer: The information for the Capital One® Secured Mastercard® and Discover it® Secured has been collected independently by CreditDonkey. The card details on this page have not been reviewed or provided by the card issuer.

Benefits: Why Use a Secured Credit Card

Secured credit cards have some distinct benefits that distinguish them from unsecured cards.

• They fulfill a need: A secured card may be the only option for someone with no credit or a poor credit history. In today’s world, a credit card is more of a necessity than a luxury, so such a card could be incredibly valuable to someone with a poor credit history who has been frustrated by their limited payment options.

• They provide a way to build or rebuild credit: Getting a credit card and keeping current on your payments are good ways to help you build credit history. You couldn’t do that with just a prepaid debit card.

• Low credit limit: The standard deposit and credit limit on most secured credit cards is in the $300 to $500 range. If you have difficulty keeping your spending in check, these cards will help you stay in line.

Drawbacks: What to Watch Out For

Secured cards have a very specific target market and very specific drawbacks.

• The cards are restrictive: While the restrictiveness of secured cards is a benefit for helping people responsibly build or rebuild credit, it’s definitely a drawback as well. You’re most likely limited to spending a few hundred dollars on the card each month.

• Money has to be deposited: Setting aside several hundred dollars as a deposit may be easier said than done for many people. Once this money is deposited, it’s used by the credit card company as collateral, meaning you can’t use it for any reason, not even to pay your credit card bill. That’s a lot of money to set aside just for the privilege of having the card.

• Hefty fees and interest rates: Secured cards come with more fees than unsecured cards. Between these fees and the deposit you have to make, secured cards are a lot more expensive to own than unsecured cards, which is even more reason to actively work toward the goal of getting qualified for an unsecured card.

Secured credit cards are valuable tools for people who wouldn’t be approved for other types of credit, including the more common unsecured cards. They’re a way to build credit history while providing many of the same conveniences that other credit cards provide. Just like you would do before selecting any other type of credit card, though, make sure to do your research to decide which secured credit card is the best fit for you.