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When your credit score is poor or your credit history is paper thin, often one of the best (if not only) ways to build up your credit score is through secured credit cards. Here are some options for ways to build your credit score with secured credit cards.
How does a secured credit card work?
A secured credit card works by you making a deposit to the bank for a given amount and then the bank usually opens you up a line of credit equal to that amount. Some banks allow for more credit than your deposit and some banks even give you a smaller credit line than your deposit. It sometimes depends on just how low your credit is.
Once you have a line of credit, you then have the opportunity to start building a credit profile by making payments on time each month. Some secured credit cards will gradually extend more credit to you over time or transition you from a secured credit card to a standard credit card (known as “graduating”). Thus, it’s imperative that once you get one of these cards opened, your serious about making on-time payments.
How much can your score improve?
Within months of having a secured credit card your credit score should start to benefit. If you’re patient enough, using one of these cards for about a 6 months to a year can seriously benefit your score — it’s not unheard of to shoot up 100 points in a 12-month period. It all just depends on what factors are holding back your score.
However, before you go applying for one of these cards, you need to know some of the key factors to look at in order to make an informed decision. Here are the the most important factors to consider when shopping for a secured credit card:
Annual Fees / Membership Fees
There are a lot of good secured credit cards with no annual fees, so it shouldn’t be hard to find one of them. The benefit of having no annual fee (besides saving money, of course) is that you won’t be tempted to close the account once you’re able to move on to unsecured credit cards. This will help preserve your average age of accounts and improve your credit score over time.
Some secured credit cards may show no annual fee but require a membership to a credit union or some sort of organization, so watch out for those. Also, some cards may come with “activation fees” that are like disguised first-year annual fees, so be on the lookout for those as well.
In the end, paying a small annual fee or membership/activation fee to get your credit score on the right track is hardly a horrible thing and is definitely worth it if that’s what your stuck with. So if you can’t get approved for an annual fee-free card, go with what you can get.
The standard minimum deposits for secured credit cards range from $200 to $500, with $200 and $300 being pretty common in my experience. (Some secured credit cards allow this deposit to earn interest but most don’t.) After finding out what the minimum deposit is, check to see if that deposit sets your credit limit. Usually it will but occasionally a bank will allow you to open up your account with more credit.
Maximum credit line
Try to find a card that will allow your maximum line of credit to grow or at least have the option to increase at some point upon request. This will make your life easier and help future creditors see that you were able to responsibly handle higher credit limits and thus increase your odds of approval.
Some cards like the Discover It have a process where after a year of successful payments you can graduate to an unsecured card. This typically does not involve a new hard pull or new account on your credit report (although YMMV) so having this option is a seamless way to build up your credit report.
Credit bureau reporting
You want your secured credit card to report to all three major credit bureaus, which are: Equifax, Experian, and TransUnion.
Most secured credit cards will report to all three but do some research beforehand and make sure that they do in order to maximize your chances at rebuilding your credit. I would stay away from cards that only report to one bureau and maybe consider those that report to only two, but honestly, with so many cards out there that report to all bureaus, try not to settle for anything but three.
The other factor you want to check is if the secured credit card reports as secured to the credit bureaus. Note: almost all secured credit cards will report as secured so don’t think of it as a negative if they report at secured but rather a rare exception to the norm that could potentially benefit you down the road.
More secured credit cards appear to be offering some type of reward system. I’d typically go for one that offers cash back or options to redeem for Visa gift cards like the Discover It or the nRewards® Secured Credit Card from Navy Federal Credit Union. However, you should go with whatever suits your needs.
Some people think that you should avoid rewards programs when you’re at the credit repair stage because the rewards may incentivize you to spend more money. While I understand the concern, I think if you’re planning on eventually getting into the credit card rewards game, you need to introduce yourself to rewards at some point, so why not now?
Furthermore, I don’t think it matters much because if you don’t have the discipline to control spending at this vital stage of repairing your credit, then chances are you’re not going to have it once you have more options at your disposal. (Just my 2 cents.) If anything, you could use your trial with a rewards secured card to see if the rewards game is really meant for you.
With that said, I wouldn’t necessarily make getting a secured card with rewards a top priority but it is more like icing on the cake. You get to get on the right track with your credit and get to be introduced to the world of credit card rewards at the same time.
This shouldn’t be a major concern because as stated, your goal at this stage is to repair your credit. APRs are really only relevant to those planning on carrying a balance. Carrying a balance, especially on a secured credit card that likely has a lower credit limit, can mean a high credit card utilization. That means your score will not be improving. Thus, APR shouldn’t be a deciding factor.
Just don’t ignore it completely. It’s good to know and become familiar with APRs and how they work so that later on you can decide if it’s worth carrying a balance on your cards and paying interest on them (hint: 99% of the time, I don’t think it’s worth it!)
You can expect to find APRs ranging from 5-25%.
So those are some of the most important factors to consider when applying for secured credit cards. If you’re interested in finding out what some of the top secured credit cards are then click here!
H-Town based Attorney turned credit card rewards expert. Founder of UponArriving.com.