If you’ve had some pitfalls in your credit history, or you just don’t have many open lines of credit, your score has probably taken a hit because of this. Fortunately, consumers with questionable credit or nonexistent credit histories can take control of the situation by applying for a secured credit card. Getting a secured credit card is simple enough, but, if you fail to pay it in a timely manner – or are irresponsible with its usage – you could find yourself worse off than before.
What Is a Secured Credit Card?
A secured credit card is similar in many ways to its unsecured counterpart. But with a secured card, you must pay a security deposit before you can use it, in case you do not repay your debt. It is designed to help consumers with no or poor credit history repair their credit and boost scores.
How To Get a Secured Credit Card
Obtaining a secured credit card is as simple as finding one that fits your lifestyle and offers you the best terms. Every financial institution has different deposit requirements or annual fees, so it’s best to do your homework and review several cards before making your final decision. For example, a Wells Fargo Secured Credit Card has a $25 annual fee and a $300 minimum deposit, while Capital One’s Secured Mastercard® has no annual fee and the minimum deposits are $49, $99 and $200, depending upon your credit score.
Once you have decided which secured card you want, apply for the card online or you may be able to apply in person at a local branch. You will need information such as your monthly or yearly income, checking or savings account number and your Social Security number to start the process. After you are approved for the card, you will then be required to make your minimum security deposit before you can begin using your card.
How To Use a Secured Credit Card
Using your secured credit card is no different than using an unsecured credit card. They look and function the same way, but unsecured cards don’t require a security deposit. When you use your card, you want to be sure you remain vigilant regarding credit utilization rates. The utilization rate is your total available credit in comparison to the balance on the card. Generally, you want to keep your credit utilization to 30 percent or less of your total available credit. In the case of your secured credit card, if your credit limit is $500, then you want a revolving balance of no more than $150. You should also try to pay your balances off in full each month before you accrue interest. This shows potential lenders and creditors that you can be responsible with the credit made available to you.
How To Close a Secured Credit Card
As long as your account is in good standing, you should be able to cancel your secured credit card at any time. The issuing financial institution could decide to use a portion or all of your security deposit to pay any outstanding balance left on the card. In the event there is none, you will receive this money back in the form of cash, cashier’s check or bank draft, as is Wells Fargo’s policy. But, just because you can close your secured credit card, doesn’t necessarily mean it’s a good idea. Depending on the length of your credit history, your secured card could be one of your oldest credit lines, and closing it may negatively impact your credit score.
Closing a line of credit reduces your total available credit, which could shift your utilization ratio into the red zone if you close a card with a zero balance while leaving one open with a higher balance. For example, if you have two cards with a total available credit of $1,500 between both, closing the secured card with a $500 limit – but no balance – would send your credit utilization through the roof if you have a $700 revolving balance on the other card. In this example, even if you haven’t used all the available credit on the card you left open, when you cancel the secured card, you take its $500 credit limit with it; so now your total available credit is only $1,000, of which $700 or 70 percent is being utilized on the open card.
It is a common misconception that you cannot be turned down or declined for a secured debit card. However, this is untrue. As with any application for credit, creditors will evaluate your creditworthiness, and you may be denied based on a reason other than your credit score. Capital One states that if you do not have a bank account, your application will be denied.
- 6 Best Secured Credit Cards of 2020 - WalletHub
- Wells Fargo: Secured Credit Card
- Experian: What is a Credit Utilization Rate?
- Capital One: Build Credit with a Secured Credit Card
- CreditCards.com: How will closing secured card, opening unsecured card affect credit?
- Discover Financial Services. "What Is a Secured Credit Card?" Accessed May 23, 2020.
- Experian. "How to Build Credit." Accessed May 23, 2020.
- Experian. "Understanding Secured Credit Cards." Accessed May 23, 2020.
- Capital One. "Secured Mastercard From Capital One." Accessed May 23, 2020.
- Discover Financial Services. "What to Do If You're Denied a Secured Credit Card." Accessed May 23, 2020.
- Discover Financial Services. "Discover It Secured Credit Card." Accessed May 23, 2020.
- TD Bank. "You May Be Eligible for a TD Bank Unsecured Card." Accessed May 23, 2020.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.