Secured Credit Cards: Their Function and Benefits

Dec 06, 2023 By Triston Martin

A secured credit card is for people with bad or no credit. This card requires a cash deposit to open. This deposit protects the credit card issuer. If you default, your deposit may be used to pay your credit card bill. The feature makes secured credit cards available to those rebuilding or starting credit.

Your deposit usually determines your credit limit. A $200 deposit means a $200 credit limit. Using a secured credit card wisely can boost your credit score, making you eligible for a no-deposit unsecured card. Secured credit cards have different deposit requirements. Typically, secured credit cards require a $200 deposit. This initial deposit determines your credit limit and begins your credit improvement journey.

Some of the best-secured credit cards offer direct unsecured card upgrades. However, some secured credit cards do not provide this upgrade path. In such cases, you must apply for an unsecured card elsewhere and close your secured credit card account. When you upgrade your secured credit card or close the account while in good standing (with all dues cleared), the issuer refunds your deposit.

Secured Credit Card Strategies for Credit Building

Using a secured credit card is a practical approach for establishing or improving your credit history, ultimately enhancing your credit score. Unlike prepaid cards, which function similarly to debit cards, secured credit cards report your account activities to credit bureaus, impacting your credit report. Regular use of a secured credit card can gradually elevate your credit score.

One of the advantages of a secured credit card is the potential for credit limit increases over time based on a positive payment record. Some issuers offer an upgrade to an unsecured card, allowing you to reclaim your deposit. The key to benefitting from a secured credit card is to clear your balances fully each month and ensure timely payments. Failing to do so, resulting in missed payments, leads to adverse reporting to credit agencies, adversely affecting your credit score.

Wise use of a secured credit card can boost scores in 6-12 months. Progress may earn you an unsecured credit card. You can avoid opening a new account by converting a secured credit line to an unsecured one with some credit cards. You may get better interest rates, fees, and rewards with a new unsecured card. Rebuilding credit with a secured card pays off with better terms. A secured credit card that fits your finances and goals is best.

Differences Between Secured and Unsecured Credit Cards

Unsecured credit cards typically attract more consumers because they don't require a security deposit and often offer more perks, lower fees, and better interest rates. However, options for unsecured cards with poor credit are limited.

Starting with a secured credit card is a strategic move. By consistently making on-time payments, you demonstrate financial responsibility. Depending on your credit management skills, your credit card issuer may then upgrade you to an unsecured card, typically within 12 to 18 months.

Both secured and unsecured cards follow a similar process in credit score building. Key differences include:

  • The minimum credit score required (above 670 for unsecured and below 579 for secured).
  • The necessity of a deposit (only guaranteed).
  • The average APR.
  • The availability of rewards.

Comparing Secured Credit Cards and Prepaid Debit Cards

It's crucial not to confuse secured credit cards with prepaid debit cards. Prepaid cards don’t contribute to your credit score, making them unsuitable for credit building. On the other hand, secured credit cards involve borrowing against a deposit and repaying later, which helps build your credit score.

Prepaid debit cards require funds to be loaded in advance and aren't linked to a bank account. While both require a deposit, their functions are distinctly different. Secured credit cards are often available for those with scores below 579 and usually report to credit bureaus, helping improve credit.

Unlike prepaid cards, they often have annual fees and an APR, typically over 20%. Secured credit cards are viable for anyone aiming to improve their credit history and are often considered the best secured credit card option.

Best Secured Credit Cards

Capital One Platinum Secured Credit Card

This is a practical and affordable way to improve your credit score. A $49 deposit gets you a $200 credit limit. It doesn't offer rewards, but it focuses on intelligent credit use.

Your account is reviewed for a credit line increase after six months of timely payments. Proper use of this card allows a deposit return and an upgrade to an unsecured card. However, be aware of its relatively high variable APR compared to other best secured credit card.

Additionally, it might not offer the same long-term benefits as other cards in its category that provide rewards. The card's features include no annual or hidden fees, a straightforward application process, and tools like CreditWise from Capital One to monitor your credit score.

Discover it® Secured Credit Card.

The Discover it® Secured Credit Card offers a welcome offer, adding exceptional value in the first year. The card is known for its automatic account reviews after seven months, potentially leading to an upgrade to an unsecured card.

It's particularly advantageous for those who spend on gas and dining, offering 2% cash back in these categories. You must consider the high variable APR, which may not be as competitive as other options.

This card's introductory APR may not be ideal for those with existing debts. It has no annual fee, cash back, or refundable security deposit that determines your credit line. Discover also provides online personal data removal and dark web monitoring for your Social Security number, improving digital security.

Self-Credit Builder Account with Secured Visa® Credit Card

The Self-Credit Builder Account with Secured Visa® Credit Card is unique in that it combines a credit-builder loan with a secured credit card. Users can qualify for the secure card without an upfront security deposit or a hard credit check, but it requires at least three months of consistent payments and a minimum of $100 saved in the account.

Diversifying your credit types saves money and boosts your credit score. However, the credit-builder loan interest and $25 annual fee may make it more expensive than best secured credit cards.

The card lacks rewards and a welcome offer, which may reduce cost-effectiveness. Benefits include reporting to all three credit bureaus, getting the Self Visa® Credit Card without a credit check, and building credit and savings.

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