Whether you’re new to the soul-sucking credit realities of adulthood or simply trying to improve a bad credit score, you might want to check out a secured credit card.
1. What is a secured credit card?
These specialized cards, great for building credit, require a down payment up-front, usually in the form of a cash deposit of around $300 to $500, though it’s ultimately up to you and your card-carrier. This payment acts as your credit limit, as well as your safety net against credit damage due to missed or late payments.
Think of the cash as a security deposit and your lender as your landlord. Let’s say you missed a credit payment at the end of the month because you forgot about it or didn’t have enough money—instead of wreaking havoc on your credit score and harassing you with passive-aggressive emails, your lender can draw from the original cash deposit to cover what you owe and will report positively to the credit bureaus which generate your credit reports.
Even better, if you pay your bills regularly, you will get your initial deposit back when you decide to move onto a traditional card—again, think of it as a security deposit! Don’t punch holes in your payment history and your lender won’t tattle on you to the credit bureaus.
2. Is a secured credit card right for me?
Like everything else in the credit world, secured cards come with advantages and disadvantages. Unfortunately, they usually have higher interest rates than traditional, unsecured cards and smaller credit limits since said limit depends on an initial cash deposit. Worse, some secured card carries like to charge unnecessary up-front fees which will make the process of application and acquisition way more expensive than it needs to be, and some others don’t report to the credit bureaus—which means that although you won’t see your score drop, you won’t see it rise either. The best way to avoid these pitfalls is to read the fine print and to stick with accredited card carriers.
3. What should I look for in a secured credit card?
We recommend Bank of America and Capital One secured credit cards as they give you the option to convert to a regular credit card later on. Additionally, their fees are lower compared to other secured cards on the market. Bank of America offers lower APR, but requires a higher minimum deposit along an annual fee. Capital One charges a higher APR, but offers minimum deposits as low as $49, $99, or $200 (depending on your creditworthiness) with the option to access a higher credit line after making your first 5 monthly payments on time.
If you’re just starting to build credit and are confident in your ability to cover all payments efficiently and on-time, Capital One may be the better choice. However, if you’ve had trouble paying your bills in full and on-time in the past, Bank of America is definitely the safer option. You’ll want to avoid Capital One’s extended, unsecured card limit if you have even an inkling of doubt in your ability to cover it. Better safe than sorry!
4. What are the alternatives?
If you’re a student in high school or college looking to get a head-start on this complicated credit stuff (bravo, by the way), your parents might be a big help. Parents can help their kids build credit by adding them to their own credit cards as an authorized user. However, utilizing this strategy requires that your parents have a good credit score and payment history, since their financial activity and creditworthiness will transfer to your own credit report.
If you’re older, doubt your parents will sign you on as an authorized user, have poor payment history, or have had your application for a secured credit card, have no fear, the credit union is here! Credit unions are nonprofit organizations, usually local, which offer more affordable options to private corporations, such as share-secured loans and credit-builder loans. Joining a credit union usually requires a small donation often as low as $15 and loan deposits are usually within the same range as secured credit cards, so they’re a safe and affordable alternative.
5. Where can I learn more?
If you’re still not sure what’s the best option for you, feel free to schedule a Free Consultation with Prime Credit Advisors for a credit analysis and price quote, or check out our website, blog posts, and FAQ!