Takeaways
- Secured credit cards help repair credit scores and reinforce good credit habits.
- Secured credit cards require a cash deposit, which acts as your credit limit.
- There are over 3.7 million general-purpose and private-label secured credit cards.
- Secured credit card holders tend to earn less than those with unsecured cards.
- Secured credit cards can help you navigate handling the responsibility of paying off your credit card and boost your credit score quickly.
What to flip the script on building credit? Consider what millions of new credit card holders do and open a secured credit card account.
Most people need to improve their credit report, build credit, and practice making smart money moves. A secured credit card could provide the financial bumpers you need to boost your success quickly. Let’s look at what exactly makes up a secured credit card.
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On Pesto’s Website
Pesto Secured Mastercard
Smart Money Rating: 4.75/5
APR: 29.99% % (Rates Vary)
Best For: Rebuilding Credit
Required Credit Score: No Credit Score Check
What Are Secured Credit Cards?
Secured credit cards are a type of credit card for consumers considered high-risk by credit card companies. In fact, the percentage of delinquencies of secured credit cards is more than double that of unsecured credit cards.[1]
Unlike traditional credit cards, secured credit cards require a cash deposit, which acts as collateral to get your account up and running. They are sort of a hybrid of credit cards and debit cards, but they have all the benefits of credit cards.
The amount of collateral you deposit for your secured credit card dictates your credit limit. For example, if your deposit is $250 in cash with your secured credit card provider, you are extended a $250 credit limit. Your deposit helps lower your default risk because if you default on your credit card payments, the company can use your security deposit to pay your balance in full.
How Secured Credit Cards Work
Secured credit cards allow new credit card users, those with a poor credit history, and cardholders working to boost credit scores a product to do this with a reasonable and guaranteed limit. These credit cards act as gateway cards for new users to develop a credit history, manage their credit utilization, make regular payments, and manage a new credit product.
Learn More: Credit Utilization Calculator: Learn How to Manage Debt
Practically speaking, secured credit cards work similarly to unsecured credit cards. You can use them to make everyday purchases, pay off bills, and manage your monthly expenses. Each month, you receive a credit card statement listing all the charges you make and offsetting credits you receive. Like a regular credit card, you must pay your minimum monthly payment on time.
Using a secured credit card responsibly, making on-time payments, and keeping your balance low will build a favorable credit record and help you quickly raise your FICO or VantageScore.
5 Steps to Apply for a Secured Credit Card
Applying for a secured credit card is like signing up for an online checking account or savings account. You can apply for a card with your bank or credit union. Here are five steps to follow to get signed up today:
1. Check Your Credit Report
First, before you apply for anything, it is a good idea to check your free credit report and learn where you stand. Understanding the details of your credit report will give you a better understanding of what kind of credit card you should apply for.
You are entitled to an annual free credit report from all three credit bureaus. To get your free report, go to AnnualCreditReport.com. Explore every aspect of your credit report and look for any errors or inaccuracies that you may be able to dispute.
2. Research Your Options
After thoroughly scrubbing your credit report, you should research the various secured credit card options available on the market. Banks and credit card companies offer secured cards with benefits, features, credit limits, and promotions.
A great place to start is by exploring reputable names you recognize and comparing their offerings. Make sure you pay close attention to the minimum and maximum security deposits, credit limits, annual percentage rates (APR), and other eligibility requirements.
Some cards have rewards programs or other credit-building tools you can leverage, which can add significant value to your credit card. Also, look at customer reviews and feedback on the secured credit card you are considering and glean some insights into the experiences of current or past credit card holders.
3. Compare Key Features
Not all secured credit cards are alike. After narrowing down your search to a few top contenders, compare the top crucial features of each card. Here are some essential features to consider:
- Security Deposit: Make sure you can afford the minimum required deposit amount. You want a large enough security deposit to allow you to make your everyday purchases without pumping into your limit. This might mean you must budget and save for your security deposit or pluck it from your slush fund. You should also check the deposit refund policy to know how to get your money back if you close the account.
- Annual Percentage Rate: You don’t want a credit card with a high APY. Choose a card that offers a reasonable APY. Consider automating your finances to pay off your monthly credit card balance so unpaid bills are not an option.
- Reward Programs: Don’t forget to consider the extent of the card’s rewards program. Travel points and cashback options can be highly advantageous. Compare the differences in point accumulation and redemption.
- Card Fees: Credit card fees can be costly. Pay close attention to the card’s fee structure, including annual and maintenance fees. Some cards offer promotional features, such as waived fees for the first 12 months.
- Conversion to Unsecured: If you are happy with your card, you might be able to fully convert your secured credit card to an unsecured credit card. This feature can seamlessly help with that transition.
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Member FDIC
Quontic High Yield Savings Account
Smart Money Rating: 5/5
APY: 4.50%
Required Minimum Balance: $100
4. Submit Your Application
Once you have selected the best secure credit card for you, the next step will be to submit your application. A high credit score will improve your chances of getting approved quickly and with the best terms. Most credit card applications can be completed on an issuer’s website or mobile app.
You must provide personal information like your name, address, social security number, and income details. You should also provide documentation to help the issuer evaluate your ability to pay the deposit and manage the card responsibly.
Read More: Earn more money and improve your chances of getting approved for a secured credit card
Once your application is submitted, the credit card issuer will check your credit history and review your information. Most online applications will provide you with approval within minutes. However, if you have a complicated credit history, it might take a couple of business days.
With an approved application, you will receive your secure credit card in the mail within several business days. Some credit card providers will supply you with your digital card information so that you can begin making online purchases.
5. Pay Your Deposit
Once your application gets approved, you must pay the security deposit before your secured credit card can be activated.
You can fund your secured credit card by an online ACH transfer, wire payment, money order, check, or debit card. Depending on your credit history, some credit card issuers will give you a credit limit over and above your security deposit amount. This is a sign they might be willing to convert your secured card into an unsecured line of credit with good credit card habits.
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Smart Money Rating: 4.75/5
Cash Back: 1-5% (Terms Apply)
App: Send, Receive, Gift Cash
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How to Manage Your Card
Once you are issued your secured credit card, you need to start using it responsibly. If you use a credit card for the first time, managing the ease of purchasing can be a learning curve. You can avoid getting into credit card debt by checking your monthly budget, having a security deposit, and monitoring your spending.
Paying off credit card debt can be challenging. Ensure you keep a tight pulse on how you spend your money and practice smart money habits. Creating a monthly budget is a potent tool that helps most people manage their monthly cash flow.
Your credit card is only one tool in your toolkit for making purchases. You can also sign up for a debit card and spend only the cash you have saved in your account. Paying with cash only is an excellent hedge against the temptation to spend frivolously.
Smart Summary
Unsecured credit cards are issued to cardholders with a shaky credit history who need to improve their credit score or want a financial safety net when dealing with a line of credit. These credit cards can bring benefits like cash back and travel rewards to help you make the most of your daily purchases.
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(1) Federal Reserve Bank Philadelphia. Secured Credit Card Market Update. Last Accessed January 7, 2025.
(2) Federal Reserve Bank Philadelphia. The Secured Credit Card Market. Last Accessed January 7, 2025.
