If you’re looking to open a credit card but either a) don’t have a credit history to speak of or b) have a credit score you aren’t super proud of, you’re not out of luck. Seriously, even if you’ve got a bankruptcy in your not-so-distant past, you can still put a piece of plastic in your wallet.
What’s the fix? A secured credit card. Never heard of it? Let us break it down for you. Most credit cards — whether they’re reward cards, cash-back cards, store cards or just plain Visas and Mastercards — are actually unsecured credit cards. This means the bank has no security — or collateral — that insures you are going to pay back the money you’re racking up by swiping.
Secured credit cards, on the other hand, ask you to put a little skin (again, collateral) in the game. They require you to pay a security deposit to the bank when opening the card. Thus, the bank doesn’t risk as much in approving you because if you don’t pay your bills, the bank will close your card and keep the security deposit for themselves. In other words, just like the lender has something they can take from you if you don’t pay your mortgage (your house) or your auto loan (your car), they have some of your cash they can use to repay themselves.
The security deposit doesn’t have to be large: Curtis Arnold, founder of bestprepaiddebitcards.com, said that the typical minimum security deposit is around $200. Whatever amount you decide to shell out to the bank will match your spending limit on the card.
Aside from the initial security deposit, secured credit cards work much the same way as unsecured credit cards. You spend money, you pay bills. Wash, rinse, repeat. The three credit bureaus can’t tell which card you’re swiping when reviewing your activity, so using a secured card has no impact on your overall FICO or Vantage score. (It looks just the same, too, so no nosy check-out clerks will raise an eyebrow.) Secured cards are there to help you, not hurt you. If you’re not practicing good habits, though, the bureaus will get wind of that, too, and your credit will weaken. Just note: While most secured card issuers report your card behavior to all three credit bureaus a few don’t. Ask before you apply. If a particular card doesn’t report to one or more of the bureaus, you won’t build (or re-build) your history with those bureaus.
How do you know if the secured credit card route is right for you? Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report, says the card is best for people trying to establish credit for the first time — like college students, young adults, and immigrants — or for people who have bad credit and want to repair their credit scores. There may also be advantages to using a secured card in some cases when you can qualify for a regular credit card, the experts note. unsecured credit cards for those with weak credit scores often have high fees and interest rates, so stay away from those, Arnold says. Instead, people with credit scores in the mid-600s or below, should opt for the secured credit card.
The ultimate goal is to graduate to an unsecured credit card, so once your score reaches above that mid-600 level, talk to your current secured credit card issuer about the unsecured credit cards they offer and if you qualify. In some cases, your card company will convert you to a regular credit card without you even having to ask.
With Rebecca Cohen