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Credit Building

What is a secured credit card & how can a secured credit card help rebuild bad credit?

Who's ready for some cold, hard truth? Here it is: Less-than-perfect credit can limit your lifestyle. Poor credit scores make it more difficult to qualify for affordable loans. You might struggle to buy a home and meet other financial goals. In layman's terms, it's a major drag.

When you boost your score, it's like you're awarded the key to the city (if the city is Awesome Finance Land, that is). You're more likely to receive lender approval. You can also access lower interest rates that decrease your monthly bills.

If you're trying to build a better credit score, find out how a secured credit card can help.

What is a secured credit card?

Traditionally, when opening a secured credit card, you must make a cash deposit. The credit card company holds these funds in an account and issues you a card for the same amount. Your deposit serves as collateral for your credit card balance so that you can qualify even with bad or no credit. In a way, you're almost extending credit to yourself as a sort of living proof to lenders that you can be trusted with their money in the future.

Some banks ask for the full deposit upfront. Others let you spread it out into several payments that appear as charges on your monthly statements.

As you make purchases and on-time payments, you'll see your credit score increase (this can be a very exciting email to get, trust us). As a result, you'll improve your chances of obtaining unsecured credit cards, auto loans, mortgages, and other types of credit.

How do secured credit cards work?

To understand how a secured credit card works, it's helpful to look at other types of secured loans. Mortgages and auto loans are secured by the asset you buy. There's something tangible, like your house or car, that the bank can take back if you pull an "oopsies" and don't make your agreed-upon payments.

Secured credit cards use the same idea. If you don't pay the bill, the missed amount comes out of your secured deposit. The bank has a lower risk of financial loss, which is why you can qualify for a secured card with bad credit.

Some secured cards use your entire deposit as the balance. Others increase your available credit beyond the deposit amount. For example, the bank might ask for a $99 deposit but extend a $250 credit line.

Although secured cards usually have less stringent approval standards, you still need to meet the bank's or lender’s minimum requirements. You may have to apply for more than one secured card before finding the right offer, but just like fishing in the dating pond for Mr. or Mrs. Right, the hunt is worth it.

Do secured credit cards build credit?

Most secured cards help you build credit as long as you pay the bill on time every month. You should also try to pay the balance in full. Using too much of your available credit can ding your credit score because it looks like you're living a little too close to the financial edge.

Here are a few other things to remember:

  • Missing payments will have a negative impact on your credit score. Going over your credit limit can also lower your score. Make sure to budget for your purchases or use your card primarily for essentials (food, gas, tacos, etc.) so you can settle your balance each month.

  • When you want to build credit with a secured card, select a bank that reports to all three credit bureaus. It's like the old "if a tree falls in the woods" scenario. If the credit bureaus don't get word that your habits are improving, your credit score won't improve either.

The length of time it takes for a secured credit card to impact your overall credit depends on a bunch of stuff, including how bad your credit is to start, how many different credit accounts you have, your activity on your other accounts, and the like. You may see changes in as little as one to six months, but larger changes can take a year to 18 months to really rack up. Patience really is a virtue in this case.

What are the benefits of secured credit cards?

If you have trouble sticking to a budget, a secured credit card can help keep spending in check. As you learn to handle money more responsibly, your card company could upgrade you to an unsecured card, like graduating from training wheels to a sweet BMX.

You'll also have your secured credit card on hand when you can't use cash. Credit cards come in very useful when you want to reserve a hotel room in Vegas, buy a last-minute plane ticket to see Grandma, or snag those sweet glow-in-the-dark chopsticks you saw on TikTok. Luckily, most secured cards can be used anywhere you'd use a standard unsecured credit card.

What are the cons of secured credit cards?

Secured credit cards do have some downsides.

  • They usually have higher fees than unsecured cards. After you pay these charges, you'll have less of your available balance to use for purchases.

  • You'll usually have to pay a higher interest rate with a secured card than with an unsecured card. For that reason, if you don't pay off your purchases immediately, they'll cost you serious cash over time.

  • Secured credit cards usually lack those awesome point systems and perk programs you'll find with unsecured cards. Don't hold your breath for sign-up bonuses, low introductory rates, or cash-back rewards.

  • Your credit limit is typically lower with a secured card than with an unsecured card. However, if you have the dough, you may be able to put down a larger deposit to increase your available balance.

  • If you don't pay on time, you'll lose your deposit. You'll also get a black mark on your credit report, which is the exact opposite of your goal.

What should you look for in a secured credit card?

Ask these questions when you're thinking about a secured credit card:

  • Does the card give you a clear way to upgrade?

    You want to make sure you can eventually switch to an unsecured card. Some banks even give you the option to upgrade without a credit check once you meet certain requirements.

  • How much will you pay in fees?

    Most secured cards have fees for signing up, paying late, or making foreign transactions. Some have higher charges than others, so compare and contrast before you commit.

  • How much is the deposit?

    Depending on the card, you'll probably have to put down about $100 or more.

  • Will you qualify?

    Sometimes, you can check out your approval odds before you apply. For example, banks may require you to make a certain amount of deposits each month. You may also need to fall under a certain debt-to-income ratio. This number compares how much you owe to how much you make. In addition, some secured cards don't accept customers with prior bankruptcies.

How can you improve your chance of approval?

These smart financial steps can boost your approval odds for a secured card:

  • Use apps to report rent and utility payments. For example, signing up for Experience Boost adds these items to your credit score.

  • Paying on time can have a positive effect on your credit. You can also earn points by maintaining a positive bank account balance.

  • Review your credit reports from all three bureaus at least once a year. You can get a free copy annually or anytime you get turned down for credit. Many banks and financial apps now offer free access to one or more bureau scores which can also be helpful in monitoring your credit history. If you notice errors, you can dispute them on the credit bureau websites. Removing incorrect negative marks can help improve your chances of credit card approval.

  • Keep an eye out for pre-qualified offers. You're more likely to get a yes from companies that reach out with positive approval odds.

  • Gather the funds for a deposit. The card company might require an electronic funds transfer from your bank account. Sometimes, you can use a money order or check instead.

What other steps can you take to build credit?

After you start using your secured card, amplify your credit increase even further by:

  • Setting a reminder for your payment due dates. Even making one late payment can dramatically decrease your credit score. If possible, set up automatic payments.

  • Calling your credit card company if you run into financial issues. Your card provider may waive your late fee in certain situations.

  • Making multiple payments each month if you can afford it. If you can't, try to pay at least the minimum balance.

  • Monitoring your credit report and reporting errors to all three credit bureaus. This step can also help protect you from identity theft and fraud.

  • Applying for different types of credit as your score increases. Examples include student loans, auto loans, and even mortgages. Diversifying your credit profile is another gold star in your favor.

What are some alternatives to secured credit cards?

If you're not sure if a secured card is the way to go, check out these alternatives for people with limited credit.

Debit cards

Debit cards provide many credit card features, and most often, you won't need a credit check to open an account. However, they limit your spending to only the amount you have in your account. They also don't raise (or lower) your credit score since they're not reported to the credit bureaus.

Prepaid cash cards

Prepaid cards are another alternative to secured credit cards. Similar to secured cards, prepaid cards let you spend up to a certain amount. You load the money in advance when you obtain the card. However, the money you pay funds your account, unlike a secured credit card, where it serves as a deposit only.

You can purchase prepaid cards at most stores (remember those racks of gift cards you always walk past in the grocery store?), so you won't need a credit check. However, you won't receive a refund for your deposit if you don't use up all the funds. Additionally, these cards often come with fees and don't help your credit since providers don't report them to the credit card bureaus.

Authorized user on someone else's card

You can also nicely ask a parent or family member to add you as an authorized user on their credit card. You can build a positive track record by association if they have good credit. Their card will show up on your credit report and contribute to your credit score.

Unsecured card with a cosigner

Consider a cosigner if you'd prefer an unsecured card but can't qualify. This person must have high enough credit for approval. However, if you don't make payments on time, it will affect their score as well as yours, and that can be tough on relationships if things start to go south.

Usually, you'll need a credit score of at least 580 to get an unsecured card on your own. If you hit that mark, it might be time to ask your credit card company for an upgrade.

Where can I get a secured credit card?

At Varo Bank! Varo Believe offers a new kind of secured credit card to help you establish or rebuild your credit. Varo Believe makes it easy to pay on-time and in-full. We report your payments to the three major credit bureaus to help improve your credit score. In fact, Believe customers, on average, see a 40-point increase in their credit score after just three months with no late payments¹. And you can monitor your score directly on the Varo Bank app.

What you need to qualify:

  • $500 or more in Qualifying Direct Deposits².

  • A Varo Bank Account without a negative balance or an overdue Varo Advance.

  • Additional qualifications apply.

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