A secured credit card can give you the opportunity to build your credit history from scratch or rebuild your credit after a hit. But with so many secured card options on the market to choose from, it’s easy to get overwhelmed.
A tip: Keep in mind that the primary purpose of a secured credit card is to help improve your credit history to the point where you can qualify for better card options. So you don’t have to focus on the long-term value from the card.
That said, it’s important to consider the benefits of each card to make sure you get the best experience and that your efforts actually help build your credit history. Here’s how to choose a secured credit card before signing on the dotted line.
1. Credit reporting
In most cases, credit card companies report your account activity, such as your balance and payment history, to the three major credit bureaus: Experian, Equifax, and TransUnion. If you get a secured credit card from a major card issuer — Capital One Platinum Secured Credit Card or Citi® Secured MasterCard*, for example — this feature is standard.
However, if you’re getting a secured credit card from a lesser-known card issuer, it’s possible that your activity will only be reported to one or two credit bureaus. The problem with that is that different issuers may pull data from different credit bureaus when making credit decisions. For example, if you get a secured card with a bank that only reports to Experian, and you apply for a loan with a lender that only checks your Equifax and TransUnion credit reports, it could be that all your hard work never paid off. didn’t happen .
2. Costs
It’s easy to find a secured credit card that doesn’t charge an annual fee, especially if you’re going with a major card issuer. But there are secured cards that charge an annual fee.
In some cases, these cards can make up for it by offering lower interest rates. For example, the First Progress Platinum Prestige MasterCard® Secured Credit Card charges a $49 annual fee but comes with a lower-than-average APR.
But if you find a card that charges an annual fee and doesn’t give you anything of value in return, it’s probably not worth it.
In an ideal world, you wouldn’t have to worry about credit card interest rates. If you can pay your bill on time and in full each month, you can avoid interest charges altogether. But if your financial situation makes it challenging to do that, try to get the lowest APR possible.
Also, note that while there are some unsecured credit cards you can get with bad credit, you’ll want to watch out for exorbitant fees. Some of these cards charge an upfront processing fee just to open an account, as well as a monthly fee on top of their annual fee. In some cases, the interest rate can be upwards of 30 percent, which is unheard of among top secured cards. It is best to avoid these cards.
3. Grace period
A credit card grace period is the time between your statement date and your due date. During this time, you won’t pay any interest until you pay off your statement balance in full from the previous month.
If a credit card doesn’t offer a grace period — and not all do — your purchases start accruing interest from the transaction date. With no grace period, a secured credit card can get expensive quickly, so getting one that has one should be a top priority.
Fortunately, most top secured credit cards offer a grace period. But even with one, it’s important to set up automatic payments on your account as soon as it’s opened so you don’t accidentally miss a payment and incur interest and late payment fees.
4. Security deposit requirements
One of the biggest drawbacks of secured credit cards is the deposit requirement. Most people who are new to credit or have poor credit don’t have a lot of cash on hand can lock in a credit card for several months.
Consequently, it is important to consider each secured credit card based on its deposit affordability. In many cases, you can find a card with a minimum deposit of $200 or $300, with a credit limit equal to your deposit. An exception is the Capital One Platinum Secured Credit Card, which offers an introductory $200 limit for deposits as low as $49, depending on your creditworthiness.
As you compare deposit requirements, it’s important to remember that lower credit limits generally make it harder to maintain a good credit utilization ratio (the percentage of your available credit that you’re using at any given time). As you work to build credit, it’s best to keep this rate as low as possible.
5. Upgrade options
Historically, you couldn’t get your deposit back on a secured credit card until you closed your account. But there are some card issuers who want to upgrade your account to an unsecured card after some time.
With the Discover it® Secured Credit Card, for example, you can “graduate” to an unsecured account and get your deposit back in seven months if you use your card responsibly and pay on time. The Capital One Quiksilver Secured Cash Rewards credit card is another example, though the card issuer doesn’t disclose when upgrades are possible.
Having a secured card that can be converted to an unsecured credit card is important because it gives you the ability to keep the account open even if you go overboard. Keeping old credit card accounts open can help build your credit by increasing the length of your credit history, especially if you have a track record of making timely payments on the account.
6. Eligibility requirements
On the surface, it seems that secured credit cards should guarantee approval. After all, you’re usually securing a full credit line with cash that the card issuer can keep if you default.
But the card issuer can still reject your application if your income or credit history doesn’t meet its requirements. For example, Capital One will not approve your application if you owe money on another Capital One account.
Also, if your credit report reveals a bankruptcy that hasn’t been discharged, you usually can’t get any credit cards. Some card issuers may also have a waiting period after the discharge date.
As you compare your options, check to see if each card issuer has a pre-approval process that can give you an idea of your approval odds. Also, read the fine print or consider calling the card issuer to learn about potential disqualifications and whether they apply to you.
If your credit situation is serious, the OpenSky® Secured Visa® Credit Card can be a solid choice because it does not require a credit check to apply.
7. Card benefits
The ultimate goal of a secured credit card is to build or rebuild credit, but it doesn’t hurt if the card you’re using also offers rewards and benefits.
For example, Capital One Quiksilver Secured Cash Rewards credit cards offer 1.5 percent cash back on every purchase you make, which rivals some of the best cash back credit cards on the market. What’s more, the card has no annual fee and allows you to get your deposit back without closing the account.
Similarly, the Discover it® Secured Credit Card offers 2 percent cash back on up to $1,000 spent in combined purchases in the quarter at gas stations and restaurants, plus 1 percent back on everything else with no annual fee. Additionally, Discover will give you back all the cash back you earn during your first year on your account anniversary.
The bottom line
If you’re looking for a secured credit card to build or rebuild your credit history, avoid the temptation to accept the first offer you see. Instead, take your time to research your options and compare card features to determine the right fit for you.
While you likely won’t use your secured credit card forever, a good one can make your life a little easier and provide added value while you work to build your credit.
*Information about Citi® Secured Mastercard® is independently collected by Bankrate.com. Card details have not been reviewed or approved by the card issuer.