Approximately 16% of Americans have poor credit, which is a score under about 580 in most cases. And, another 18% of Americans have fair credit, which is under 670.
As Money Under 30 points out, “most so-called ‘prime’ and ‘super prime’ credit cards are only available to applicants with credit scores of 750 or better. These include most American Express, Chase, and Bank of America credit cards.” This means that at least 34% of the entire country can’t access these cards.
We get it, though. Nobody taught us about credit in school, and quite a few of us didn’t grow up in households where our parents or guardians taught us the basics of managing money and building credit wisely. That’s okay! We’re here to help you learn now.
If you have poor or fair credit, for whatever reasons, you still have options. A secured credit card is often a pathway to building or repairing credit. Here’s what you need to know about secured cards and how to work towards increasing your credit score by using one.
Learn better by watching videos? Download the Wealth Stack app to view fun, engaging video courses about how to improve your personal financial situation.
What is a Secured Credit Card?
A secured credit card is a type of credit card that requires a security deposit. Generally, you'll need to put down at least $200 before you can start using your card. The idea behind this is that it will help reduce the risk for the lender in case you default on payments and they're not able to recoup their losses through selling your collateral (in this case, your security deposit).
However, do note that we’ve used the term security deposit here, as that money will eventually be returned to you. Usually, after a period of being in good standing and making on-time payments, the credit card company will return your deposit to you and convert the card into a regular, unsecured credit card (this usually comes with a credit limit increase, too).
What Do You Need to Get Approved for a Secured Credit Card
To qualify for a secured credit card, you don’t need to meet a minimum credit score requirement. This is because, as mentioned above, you’re securing the card with your own money. However, this obviously also means that you will need to ensure that you have at least $200 to put towards the deposit.
It’s important to note that while the minimum deposit required to qualify for most secured credit cards is $200, the Secured Mastercard® from Capital One is one option where certain applicants can qualify for a $200 credit card limit with a deposit of just $49 or $99.
The Discover It Secured Card is a great option for beginners as it’s one of the few secured cards that comes with great rewards. You can receive 2% cash back at gas stations and restaurants with 1% unlimited cashback on all other purchases. And, similar to the Secured Mastercard® from Capital One, the Credit One Bank Visa allows you to receive up to $300 in credit by paying a fee of just $95. So, essentially, you’re able to access $205 of cash even if you have poor credit.
The Pros & Cons of a Secured Credit Card
Let’s start with the bad news first. Obviously, the deposit you have to put down isn’t ideal. Secured cards require that you make a deposit in order to be approved, and the amount is usually equal to your desired starting balance.
Another drawback of secured cards is that, while some of them do offer rewards, they are typically lower than other types of cards. This is because it's difficult to get points since the requirements for approval are stricter on this type of card. So although these cards can help rebuild credit scores over time, they aren't an ideal option for those looking to rack up points quickly.
Now, what about the pros of using a secured credit card? Well, for those with poor or no credit, it’s really a fantastic way to repair or build credit. As long as you can afford to put the $200 deposit down, it’s a truly great and easy way to start improving your credit score.
We suggest purchasing something small each month, such as a tank of gas, and paying it off immediately. The credit card company will see that you’re responsible with your payments and that you are using credit wisely. They’ll report those payments to all of the major credit bureaus, which help improve your score over time.
After a period of time (in some cases as short as five months), most companies will perform a review and give you your deposit back while also increasing your credit limit. As you’ll likely have already forgotten about that deposit, it makes for a nice little bonus in your pocket once they return your deposit!
Choosing the Right Secured Card
If you can, we’d suggest trying to definitely find a card with a $0 annual fee (that goes for regular credit cards as well). And, if you can find a secured card that offers you points, even better.
However, in the long-run, the goal should be figuring out which company you’d like to have a card with in the future. For example, if you’re really attracted to the Chase Sapphire Preferred Card or the Bank of America Travel Rewards Credit Card, look into whether those banks offer secured credit cards.
Why? It’s easier to upgrade to a different card once you already have a credit card with a bank. They can easily access your payment history and upgrade you without you having to create a whole new credit account elsewhere.
Invest in Your Future
We’ve said it before and we’ll say it again: your credit score is the foundation of your financial future. Excellent credit management will lead to a higher credit score, leading to reduced costs when borrowing money to build more wealth.
Living within your means, managing debt wisely, and paying all your bills, including minimum credit card payments on time, are always considered very smart financial moves for those interested in credit building. And, if you have poor or no credit, a secured card is a great way to start your credit journey.
Interested in learning more about building your financial foundation? Ready to start investing in yourself? Download the Wealth Stack app today for free to learn from our professional speakers and free financial videos.
