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What To Know Before Opening a Secured Credit Card

August 31, 2018

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Need to build your credit? A secured credit card could help you move the needle in the right direction.

A secured credit card looks just like an unsecured credit card and works like one in most ways but it’s designed for people who are working to improve their credit.

When you open a secured credit card, the issuer will ask you for a refundable security deposit. That’s typically between $200 and $500; the deposit amount generally equals your credit limit and acts as a backstop to help limit the issuer’s risk.

Because of the security deposit requirement, it can be much easier to get approved for a secured card than an unsecured card.

To get a secured credit card, you may also need a bank account in good standing. For example, you can connect your no-fee Varo Bank Account to your secured credit card to make payments.

If you’re looking for a secured card and want to build your credit, there are a few important points to keep in mind:

1) You don’t necessarily need to pay an annual fee.

Many credit cards have an annual fee, but with unsecured credit cards, the fee is often accompanied by top-tier rewards. With secured cards, you might not get any additional benefits for paying an annual fee, and you have to watch out because some cards also charge a monthly maintenance fee.

Shop around before you apply, and you’ll see that there are options without monthly or annual fees.

Keep an eye out for other common credit card fees as well, such as ones for foreign transactions, balance transfers, and cash advances. You can avoid these by being careful about how and when you use your card. And try not to carry a balance as secured credit cards tend to have high-interest rates.

2) There’s no guarantee you’ll get approved.

Although it’s easier to get approved for a secured card than an unsecured card, some applications still get turned down. For example, you might not get approved if you have an unresolved bankruptcy or you have another account from the same issuer that isn’t in good standing. You also might need a bank account or savings account to qualify for some secured cards.

Even when one issuer denies your application, a different issuer could still approve you. However, you may want to check the fine print for restrictions before you apply because each application could hurt your credit score a little.

3) Make sure the issuer will report your account to the credit bureaus.

In order for your secured credit card to help you build credit, the card’s issuer will need to send your account information to the credit bureaus, which can then add it to your credit reports. However, companies aren’t required to report your account or activity to the bureaus.

Check with the card’s issuer before you apply to make sure it will report your account and activity to all three national consumer credit bureaus. Most major credit card issuers will, but it’s best to double-check anyway.

4) Your score might drop a little when you apply.

When you apply for a new credit account, the creditor may pull your credit as part of its approval process. The review, also known as a hard inquiry, can wind up on your credit reports and stay there for two years. Even if you’re not approved for the account, it could have a small negative impact on your credit scores.

A few credit card issuers let you apply for pre-approval, which could show you which cards you’ll likely get approved for without hurting your credit scores. The issuer may still check your credit reports, but can do so with a soft inquiry which won’t impact your scores. You can then decide to move forward with an application and hard inquiry.

Generally, you don’t need to worry too much about the drop from a single hard inquiry, but it’s good to know a small drop isn’t uncommon. However, multiple hard inquiries during a short period could lead to a larger drop.

5) Only use a small portion of your available credit and always pay on time.

Two of the most important credit-scoring factors are your payment history and your credit utilization rate, the amount of your available credit that you use—less is better for your credit scores.

To build a good credit history, make sure you always pay your monthly bill on time. Even if you can only afford a minimum payment, that’s better for your scores than paying late. To keep your utilization rate down, try to only make one or two small purchases with the card each month.

If you want to accomplish both, you could use the card for an inexpensive monthly subscription, sign up for auto payments, and then not use the card for anything else.

6) The security deposit isn’t for your monthly payments

While the card issuer could keep your security deposit if you fall behind on your credit card payments, the security deposit isn’t intended to cover late or partial payments. It’s there in case you don’t make payments for several months and default on the account. During that time, your account could continue to accrue interest and late payment fees during that time, and the late payments could hurt your credit.

It’s generally best to only make purchases when you can afford to pay the bill in full. If you keep up good money habits and build your credit, you may qualify for an unsecured card. You could then close your secured card and get your security deposit back.

Louis DeNicola is a freelance personal finance writer and credit enthusiast. You can find him on Twitter @is_lou.

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Louis DeNicola

Louis DeNicola

Louis DeNicola is a freelance finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to Varo, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including Credit Karma, Wirecutter, Funding Circle, and Experian.

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