Best Secured Credit Cards
Secured credit cards are a great option for those who are looking to establish credit or needing to rebuild their credit history. If you've never carried a credit card before but would like to start somewhere, the cards on our list below may be worth considering. You'll need to put down a deposit as collateral in order to establish your credit line. If you wish to obtain more credit, the card issuer may allow you to add to your deposit or may simply extend you additional credit over time.
But you may want to check out other options in the following locations: Best Credit Cards
Top Credit Card Deals
Best Prepaid Debit Cards
Secured Credit Cards For Those With Insufficient Credit
Having bad credit is kind of a catch-22. You need to establish new credit in order to improve your score and yet your existing bad credit will keep you from getting a credit card in most cases. But, there is a solution. More and more individuals with poor or no credit are turning to the secured credit card arena. These cards do not require a credit check as they are backed by a security deposit you make with the credit card company and in many cases will be reported to all three major credit bureaus, allowing you to start rebuilding your credit. Here’s how it works:
- All borrowers, regardless of credit, are approved to carry a secured credit card. The borrower opens an account and establishes an interest bearing savings account with the credit card company. The credit card is then issued with a limit that is commensurate with the balance in the savings account. Over time, the credit limit of the card will be extended beyond the balance of the savings account as long as the borrower continues to demonstrate responsible payment behavior.
So, once you own such a card, the amount of money that you keep in your newly opened account becomes your credit card limit. If you want more buying power on your credit card, you'll need to deposit more into your account. That is, your deposit serves as collateral and for all intents and purposes, represents your credit line. If you've got $400 in your account (most cards keep to a limit between $300 and $500), then you can charge up to that amount on your credit card.
- You can always increase your credit line a few ways and it's all based on good financial behavior: add to your existing deposit and your credit line will go up. Or keep a good track record with your card company or bank, and the institution may simply raise your credit line based on your good history.
- In the event that the borrower defaults on the balance of the card, the savings account is forfeited. However, if the borrower closes the account in good standing, the savings account balance is returned to the borrower, plus interest.
This kind of card is called "secured" because the financial institution has a hold on your money before you can spend any of theirs. On the other hand, an unsecured credit card works by allowing you to spend before they ask for your money -- many times, you get to this point after you graduate from using secured cards and establishing a clean credit history. It's also at this point that many consumers go astray and forget that a credit line is not a source of free money but actual debt that needs to be paid off. So once you end up cleaning up your credit (or building it up successfully), protect it like a hawk!
One of the biggest drawbacks to using a secured credit card is the fees. A secured credit card works a lot like a regular credit card in that the card issuer makes the bulk of its profit through the use of interest rates on balances carried longer than 30 days. These interest rates are somewhat higher than those levied on unsecured credit cards that are issued to individuals with good or excellent credit. However, these rates can be avoided if you pay your balance in full every month. Also, there are set up fees and account maintenance fees to be aware of. It’s best to comparison shop card products to make sure that you find the best card for your circumstances for the least cost.
The other thing to keep in mind is that the balance on a secured credit card must be paid just like the balance on any other credit card, security deposit aside. Using your secured card responsibly and making regular, on time payments are keys to establishing a good credit history. Issues with your secured credit card can be reported negatively against your credit report if you miss payments, exceed your credit limit or default on your agreement.
Re-establishing good credit is a key factor in creating a sound and secure financial future. Borrowers that choose to obtain a secured credit card and handle their account responsibly can expect to upgrade to a regular, unsecured credit card in a matter of months.
{ 13 comments… read them below or add one }
I never heard of this before but it is interesting to hear the differences between cards. May be a nice option for some.
Decent options here but there are a lot better ways to boost credit rating than secured credit cards.
The basic thing that helps is simply revolving payments to establish payment history. Car payments, department store payments, secured bank loans, etc all do the same thing. At least with these you are getting something…
The FTC warns those looking for secured credit cards to watch out for scams. In particular, avoid offers that involve calls to 900 numbers and promises to fix your credit, which can be exorbitantly expensive. You can fix your credit on your own by establishing good credit management skills and by managing your debt responsibly.
Capital One will be coming out soon with secured credit cards.
A secured credit card is a good way to go. But, you have to watch the fees. Also, some unscrupulous issuers charge a “fee” each month that you don’t use the card. So, if you load it and put it in your wallet, these fees could be eating away at the deposit.
Read the fine print.
Douglas @ 0creditcardsguide.com
Opening an account doesn’t just grant you better control over your expenses, but builds your credibility in the eyes of the credit companies. They view such as a sign of responsibility, which makes you more trustworthy, which can lower the rates and improve the terms you agree to.
Yeah, I had never heard of the inactivity fee, but thanks for letting me know!
The FICO scoring system only gives you points based on your OPEN and ACTIVE accounts. If you don’t have any open and active accounts, you will have a ZERO credit score. If you have no open and active accounts, you may need to get a secured credit card because you might not qualify for anything else.
Never close your accounts. Closed accounts are worth nothing to your scores.
New accounts don’t help much either. It’s better to piggy back off of other peoples credit cards as an authorized user. This will immediately increase your credit score. Learn more about how FICO scores really work here.
@Jason,
Yes, Capital One now has such cards available. We update our list on this page to reflect the latest products. Thanks!
Secured cards are good starter cards if you want to improve your credit. There was a time when it was so easy to apply and qualify for loans, that nobody worried about their credit. Some years back, I didn’t bother to read the fine print on cards, thinking they were all pretty much alike, but not the case nowadays, so I pay more attention.
I’m applying for a new card but I’m not sure if I should go with a secured kind. I may still be eligible for a Discover.
You can bring up your situation to the card company. You can get a lot of info from them, especially if you have specific questions. But I’d like to clarify a few things — what most of us know as credit cards are actually UNsecured credit cards. This means that a bank or credit card issuer is loaning you the money with the expectation that you will pay it back. This is a true line of credit and the reason that so many people get in to trouble with credit cards.
But a secured credit card behaves differently. Here’s a refresher on how it works: let’s say that a bank contacts you and offers you a credit card where there is no credit check and you are guaranteed to be approved. The only thing you have to do is open an account with them and keep a balance in the account at all times.
Orchard Bank is a popular secured card which used to be issued by HSBC Bank. Now it’s being issued by Capital One since they acquired HSBC.