As much as some people would like to think that they can get along without them, the reality is that it’s very difficult to get through life without a credit card. However, for people who are trying to establish or rebuild their credit, the frustration is they can’t get one until they can demonstrate their creditworthiness. That’s where a secured credit card can provide the best solution – it has the same attributes and acceptance as a credit card, but it doesn’t require a good credit history to obtain one; and, because it can help build your credit history, it becomes a stepping stone to obtaining an unsecured credit card.
How a Secured Credit Card Works
A secured credit card looks, feels and acts virtually the same as an unsecured credit card. It is usually issued as a Visa or MasterCard, so it is accepted as such. The only real difference is that the credit line is established by a savings deposit on account with the issuing bank. The deposit, typically in the range of $250 to $2,500, is immediately available as your line of credit, all or in part.
With some secured cards, a percentage of your deposit is held in reserve as a “cushion” should you go over your credit limit or miss a payment. Conversely, there are some banks which may actually add some real credit on top of your secured line and, should you demonstrate a solid payment history, they will increase your credit limit on top of it. When your bank starts increasing your credit limit, you may be ready to apply for an unsecured card.
As with unsecured cards, you are charged interest monthly and there is usually an annual fee. Generally, the interest rate or annual percentage rate (APR) on secured cards is lower than those of unsecured cards, as are the annual fees. And, just like regular plastic, if you’re late with a payment, you will be charged a late payment fee. So, from that standpoint, secured cards do offer the opportunity to learn how to use your credit responsibly.
How a Secured Credit Card Helps to Build Credit
The most important aspect of a secured card is that your payments are reported to the credit bureaus (you definitely should verify that your issuer does report payments to the credit bureaus). Depending on your overall credit and financial situation, you could build a payment history sufficient enough to qualify for additional credit within a six to 12 month period.
Your goal should be to convert to an unsecured card as quickly as possible. To that end, it would be important to manage your use of a secured card as you would an unsecured card. That means making on time payments and keeping your balance below 25% of your credit limit. Better yet, just pay it in full each month.
Secured Credit Cards Have Become Popular
You may be surprised to know that secured credit cards have gone main stream and their popularity is only increasing. An increasing number of people are using them out of practicality and, perhaps, in pursuit of frugality, which has become fashionable these days. It has become a go-to card for households and businesses that want to create more structure in their budgeting and more effectively manage their cash flow. Of course, it is the perfect option for families that want to instill good credit habits with their teenage children.
What most people may not know is that secured credit cards have come a long way since the early days when they were the only option for people without credit. In fact, an increasing number of people are learning that they can be a great financial management tool.
See How Secured Credit Cards Have Changed
Low Annual Fees
While they were once notorious for their high account fees, secured credit cards can now be found with fees lower than their unsecured credit card counterparts, or with zero fees. The growing interest in secured credit cards has spurred a competition among issuers, so low or no fee cards are widely available.
Interest Earnings
Some bank issued cards offer an interest-bearing account that puts your deposit balance to work until you spend it.
Direct Deposit
You won’t even have to think of it as a secured credit card; rather a repository for your paycheck earnings. Most issuers can offer a direct deposit arrangement with your employer.
Earn Rewards on Purchases
An increasing number of secured card issuers are offering rewards and cash back programs, allowing to you to save money while building your credit.
Bank from Home
As with any type of credit card, most secure credit card issuers offer online access to your account making it very easy to manage your banking, your bills, your cash flow, and your budget.
Fraud and Warranty Protection
One of the more important reasons to use a credit card for any purchase is to gain the protection against product defaults. Your money is also protected against the fraudulent use of your card.
What to Look For in a Secured Credit Card
The growing popularity of secured credit cards has spurred competition among credit card issuers, which has led to many upgrades in their features and terms. Except for the source of credit, it is difficult to find the distinction between secured and unsecured credit cards. Consumers now have many more choices available to them, which increases the importance of comparing them and not settling for an average card. The following criteria should be used as a basis for comparison:
Credit Bureau Reporting
It is the primary reason for obtaining a secured card – building your credit – which can’t happen if the issuer doesn’t report payments to the credit bureau. It is important to check to see that the issuer reports payments to all three credit bureaus.
Credit Limit
Although most secured credit card accounts start out with a credit limit based on your initial deposit, some issuers allow cardholders to increase their limit by adding to their deposits. Better yet, depending on your creditworthiness, some issuers will actually increase the credit limit over and above the deposit amount.
Upgrade to Unsecured Card
Some secured card issuers include a specific pathway to converting a secured credit card account into an unsecured account based on payment history. The issuers that offer this opportunity will monitor your account and, after six to 12 months, they may automatically upgrade your account.
Reasonable fees
Secured credit card fees have come down substantially and most offer fees below $40. Several cards have zero annual fees, but they may be laden with smaller, hidden fees. Avoid cards that require monthly maintenance or application processing fees.
Reasonable APRs
Generally, the annual percentage rate (APR) on secured credit cards is higher than credit cards. Although the APR shouldn’t be a major consideration, because secured credit card users should always strive to pay their balance in full each month, many cards offer reasonable rates in the range of 20 to 29%. Some cards can be found with rates below 15%.
Interest on deposit
Some issuers treat your deposit like a savings account that can earn interest. While it may not be a critical feature, it’s nice to know that your money is working for you while you wait to use it.
You have Choices, So Compare All of Them
Even people with the worst credit have a choice in secured credit cards. Although the features and terms may not be the best (i.e. higher annual fee, lower credit limit, higher APR, etc), there are still options available. If your credit is fair to good, your options open up to cards with low or no annual fees, lower APRs and higher credit limits. Regardless, secured credit cards should be considered for all of their features and terms and which one offers the best opportunity to quickly and affordably build your credit. Any secured credit card should be used strictly with that goal in mind, which means limiting its use, making on time payments and paying the balance in full each month.
Compare the Top Secured Credit Cards
In comparing some of the more popular secured credit cards, these were found to have the most matches with the criteria listed above (all the cards listed match the first criteria of credit bureau reporting):
Best All-Around Secured Credit Cards
Discover it® Secured Card
APR: 23.24%, variable (10.99% on balance transfers for 6 months)
Rewards: 2% cash back at restaurants and gas stations, 1% cash back on regular purchases, double cash back for the first year
Security Deposit: $200 - $2,500
Fees: No annual fee, 3% on balance transfers, $37 late payment fee
Discover cards have always been known for their robust rewards programs, paying cash back on most everyday purchases. Well, Discover decided not to leave its secured credit cardholders behind by offering 2% cash back on up to $1,000 of restaurant and gas spending per quarter and 1% back on all other purchases. Like its rewards program for unsecured credit cards, the rewards never expire. While a cash back rewards program shouldn’t be the only reason to consider a secured card, Discover offers several more good reasons for you to consider.
First, there is no annual fee, which is amazing since it does offer a rewards program. It also waives the late fee the first time you miss a due date, but there is no penalty APR for paying late. Second, it offers an automatic upgrade to an unsecured card after 12 months of on time payments. Once approved, the account switches over automatically with all rewards points intact. Third, it offers free access to your official FICO® score, which can be obtained through your online account. That is a great benefit for people working to raise their credit score. Discover does report payments to all three credit bureaus.
The card’s 23.24% APR is a little on the high side, but it shouldn’t matter if you pay your balance in full every month. Balance transfers are charged 10.99% for six months. Its minimum deposit of $200 is not the lowest around, nor is its maximum of $2,500 the highest, but it should be fine for most people who are trying to reestablish their credit. The credit line is equal to the amount on deposit. Because the initial deposit must be drawn from a bank account, people without a checking or savings account will not qualify.
Not to harp on the rewards program, but, as an added bonus, Discover will match all cash back earned at the end of the first year automatically for first-time cardholders.
Capital One® Secured MasterCard®
APR: 24.99%, variable
Rewards: Standard Capital One customer perks
Security Deposit: $49, $99, or $200
Fees: No annual fee, $10 or 3% on cash advances, $35 late payment fee
Although the Capital One® Secured MasterCard® has slightly stricter qualifications than other secured cards, it can be one of the best to use if you are concerned about fees. It has none. It does require that you have a checking or savings account and you are not likely to be approved if you are coming out of bankruptcy. Capital One also looks at your expenses and may not approve you if there isn’t enough cushion between your income and your rent payment.
Once approved, however, you can deposit as little as $49 and obtain $200 in credit if you have fairly good credit. If you have good credit, a $200 deposit could qualify for a credit line of up to $3,000. Otherwise, the minimum deposits required for a $200 limit are $99 for fair credit or $200 for less than fair credit. Capital One will monitor your credit, and if your credit score improves, it may increase your credit line. Capital One® will monitor your payments as well and, if you make five on time, it will consider you for an upgrade to an unsecured credit card.
The Capital One® card has a 24.9% APR on purchases, cash advances and balance transfers. While that is higher than some other cards, it is offset with the absence of an annual fee. Plus, at 25 days, its grace period is long enough to gather the money necessary to pay the balance in full each month, which would avoid interest charges.
One of the nice features of the Capital One® secured card for people trying to improve their credit standing is the availability of Capital One’s online account management and its Credit Tracker, which provides free credit-monitoring and a credit simulator tool. Capital One® will report your payments to all three credit bureaus.
OpenSky® Secured Visa® Credit Card
APR: 17.64%, variable
Rewards: N/A
Security Deposit: $200 - $3,000
Fees: $35 annual fee, $6 or 5% on cash advances, 3% on foreign transactions, $27 late payment fee
For people with poor credit, the OpenSky® Secured Visa® Credit Card is a good choice because the bank doesn’t run a credit check; nor does it require a checking account. The glaring weakness of the card is that it doesn’t offer an upgrade to an unsecured account. However, it does report to all three credit bureaus which means you will have the opportunity to build a good credit history that will improve your chances of obtaining an unsecured card from another issuer. Your deposit is your credit limit and can range from $200 up to $3,000 depending on your creditworthiness.
As for the rest of the card’s features, they rate as about average, or reasonable in terms of costs and other terms. There is an annual fee of $35, which is on the high end of reasonable, but it does come down hard on late payments with a $27 fee and returned payments with a $25 fee. If you are going to travel outside of the country, you should leave this card home because of its 3% foreign transaction fee.
The card’s APR is actually more than reasonable at 17.64%, though it does charge a penalty APR of up to 21.99% for late payments. As a small bonus, there is no interest charge during the first billing cycle.
The OpenSky® Secured Visa® Credit Card is an ideal choice for people who may have run into difficulty obtaining a secured card from another issue due to credit issues.
Major Bank Secured Credit Cards
BankAmericard® Secured Visa® Credit Card
APR: 20.49%, variable
Rewards: Security deposit returned after first year of good credit practice
Security Deposit: $300 - $4,900
Fees: $39 annual fee, 3% on balance transfers, 3% on foreign transactions, $37 late payment fee
The BankAmericard® Secured Visa® card is a good choice for people who want to build a relationship with a major bank and have a good opportunity to earn an upgrade to an unsecured credit card. The minimum deposit is $300, but you could be approved for a higher credit limit, up to $4,900 depending on your income and credit standing.
The fees and interest charges are fairly reasonable -- $39 for the annual fee, and 20.24% for the APR. However, a late payment can boost your APR to as high as $29.99%. The cash advance APR is 24.99%. The card also charges 3% on foreign transactions.
The BankAmericard® Secured Visa® card is not the least expensive secured credit card, nor the most expensive, but it could be the right card for people who want the opportunity to move up to an unsecured credit card with a major bank.
U.S. Bank Secured Visa® Credit Card
APR: 19.24%, variable
Rewards: N/A
Security Deposit: $300 - $5,000
Fees: $29 annual fee, 3% or $5 on balance transfers, 2% on foreign transactions, $37 late payment fee
U.S. Bank offers a similar opportunity to work with a major bank to improve your credit and trade up to an unsecured credit card after 12 month of on time payments. The terms and fees are more reasonable than the BankAmericard, with a $29 annual fee and an 18.99% APR. There is no penalty APR and it also offers a longer grace period than most cards with 24 to 30 days to make a payment before incurring interest charges.
Unlike BankAmericard, which could boost your credit limit over and above your deposit, the U.S. Bank card sets your limit according to your deposit. The minimum deposit is $300 and the maximum is $5,000. However, U.S Bank offers the advantage of keeping your deposit in an interest-bearing, FDIC-insured savings account.
When you do qualify for an unsecured card after 12 months, you account is automatically transferred and you will receive a full refund of you security deposit balance with interest.
Along with some of the other benefits typically included with a Visa® card, such as warranty protection, the card also includes free rental car insurance when you use it to charge a rental purchase.
Citi® Secured MasterCard®
APR: 22.24%, variable
Rewards: N/A
Security Deposit: $200 - $2,500
Fees: No annual fee, 3% or $5 balance transfer, 3% on foreign transactions, $35 late payment fee
Citigroup is another major bank that offers a secured card as a gateway to an unsecured account. The minimum deposit is $200 and the maximum is $5,000 with the credit line equal to the amount of deposit. Deposits are held for a minimum of 18 months and there are is no interest earned. Although there is no automatic upgrade available, Citi may return your deposit after 18 months of on time payments which, in essence, means your card is unsecured. Cardholders can apply for a higher limit, lower APR unsecured credit card at that time.
The card’s fees and charges are within the reasonable range, with a $25 annual fee and a 22.24% APR. The penalty APR is can get as high as 29.99% and the cash advance APR is 25.29%. Late payment fees are $35 and the over-limit fee is a hefty $39.
In addition to the typical benefits that come with a MasterCard®, Citi adds a few nice ones with Trip Cancellation & Interruption Protection and Worldwide Car Rental Insurance.
The Citi® Secured MasterCard® is a good option for people who want to work with a major bank with the goal of obtaining an unsecured. It can be a very expensive card, however, if the card is not used properly, resulting in late payments, carrying a balance, or going over the credit limit.
USAA Secured Card Visa Platinum®
APR: 10.15% - 20.15%
Rewards: Special military member benefits
Security Deposit: $250 - $5,000
Fees: $35 annual fee, 3% on balance transfers, $10 or 5% on cash advances, $35 late payment fee
The United States Automobile Association (USAA) is a full-service financial services company that serves military members and their families. Its mission is to offer its military members the highest quality financial products at the lowest possible cost, and it accomplishes just that with its USAA Secured Card® Platinum Visa®. The card offers an APR range of 10.15 and 20.15% depending on creditworthiness. Its annual fee of $35 is moderately high, but the card does come with some decent benefits.
The card includes special benefits available only to military personnel, including a Deployment and PCS APR of 4% of balances for up to 12 months while a member is under deployment. There are no foreign transaction fees for use overseas.
The minimum deposit is $250 and the maximum is $5,000. The security deposit is held in a two-year certificate of deposit earning a variable rate. Members who serve in a qualified military campaign such as the Global War on Terrorism Expeditionary, the Iraq Campaign or the Afghanistan Campaign can have the finance charges that accrue during the campaign rebated.
In addition to added benefits such as extended warranty protection and travel accident insurance, the card includes collision damage waiver coverage.
When combined with all of the great services, products and benefits offered by USAA, the USAA Secured Card® Platinum Visa® is a great choice for military families.
Credit Union Secured Credit Cards
Credit unions that offer secured credit cards tend to offer the best terms for fees and APRs, but the problem is you have to be a member to apply for one. If you do belong to a credit union, it should be the first place you look for a secured card. If you are not a member of a credit union, there are some that offer the opportunity to join for a one-time, nominal fee.
State Department EMV Savings Secured Visa Platinum Card
APR: 7.24% minimum
Rewards: Five flexpoints for paying a bill, 1 flexpoint/$ spent on regular purchases
Security Deposit: $250 minimum
Fees: No annual fee, no foreign transaction fee, $25 late payment fee
You will find the State Department EMV Savings Secured Visa Premium Card on top of many lists for the best secured credit card. Considering all of the criteria, this card is definitely among the best. Its only drawback is there is no opportunity to graduate to an unsecured credit card. However, with its low fee and APR, it makes it very easy to build your credit score quickly, which will enable you to qualify for an unsecured card with another issuer. The great news is you don’t have to be employed by the State Department to apply for the card.
At 6.99% this card’s APR is as low as there is for a secured credit card. It’s even lower than most credit cards. It should not encourage you to carry a balance, but if you have to, it is far more manageable with this APR. There is no annual fee, so, as long as you make payments on time and pay your balance in full each month, this card will cost your nothing. Your deposit is your credit limit and the minimum is $250. Although there is no opportunity to upgrade to an unsecured account, the absence of an annual fee will enable you to keep this account open after your qualify for an unsecured account. The benefit is that keeping an aging credit card account open helps to build your credit score.
Incredibly, the rock bottom cost is not even the best feature of this card. The State Department secured card offers a rewards program that awards points equivalent to 1% cash back on all purchases.
As previously indicated, you do not need work for the State Department to be eligible for a secured credit card. As an alternative, you can purchase a lifetime membership to the American Consumer Council for $15, which entitles you to full membership with the credit union.
Navy Federal Rewards Secured Credit Card
APR: 9.24% - 18.00%
Rewards: 1 point/$ spent on regular purchases
Security Deposit: $500 minimum deposit
Fees: No annual fee, no foreign transaction fee, no balance transfer fee
If you are a member of the military, you can have access to the Navy Federal Secured Card, which is one of the best secured credit cards available. It’s low APR and zero annual fee make it among the most affordable cards around and that is sweetened with a rewards program for savings on purchases.
The card’s 9.24% APR is among the lowest of all secured credit cards, which is a big plus if you ever have to carry a balance. While that is the lowest rate available for this card, the actual rate applied could be higher depending on your creditworthiness. It is also a variable rate which can increase as the market dictates. Regardless, the larger focus for secured credit cardholders should be on keeping overall costs down while working towards improving their credit, and that’s where this card excels. It has no annual fee and there are no fees for balance transfers or foreign transaction. For cash advances the fee is $0.50 at a Navy Federal Credit Union Branch, domestic or foreign, or $1.00 at non-branch ATMs.
Cardholders can save more money with the card rewards program which awards one point for every dollar spent. Points can be redeemed starting at 1,000 points and they don’t expire for 4 years. 5,000 points will get you a $50 gift certificate at Best Buy or Macy’s.
The secure credit card is available as a Visa@ or MasterCard@ which include all of the standard benefits offered by both. In addition, the card includes collision damage waiver (CDW) coverage when you use the card to purchase a car rental for 15 days or less.
While there is no opportunity to upgrade your account, the zero annual fee makes it worthwhile to hold onto the card even after qualifying for an unsecured credit card to help build your credit history
You do have to be affiliated with the military to get this card. This includes any of the Armed Forces, the Department of Defense, Coast Guard or National Guard – active duty, reservist and retired personnel. Family members may also be eligible for membership.
Low APR Secured Credit Cards
Although the low APRs on these cards seem attractive, it may not be enough reason to choose these cards over some of the others when you consider all of the criteria for a solid secured credit card. These cards do report payments to the three credit bureaus, and they don’t require good or even fair credit for approval, but at $44 to $49 for an annual fee, they can be very expensive for those making a smaller security deposit. People using a secured credit card should avoid at all costs carrying a balance regardless of the APR. If that can be accomplished, the APR, whether it’s high or low, shouldn’t matter.
First Progress Platinum Prestige MasterCard®
APR: 11.99%, variable
Rewards: N/A
Security Deposit: $300 - $2,000
Fees: $44 annual fee, $10 or 3%on cash advances, 3% on foreign transactions, $38 late payment fee
If a very low APR is high on your list for an unsecured credit card, then the First Progress Platinum Prestige MasterCard® may be your best option. At 11.99% its APR is lower than most secured cards except those issued by some credit unions. Unlike a credit union, however, anyone can apply for this card. Outside of the low APR, there is nothing particularly extraordinary about the card. It is a fairly vanilla card with no opportunity for upgrading to an unsecured credit card. At $44, the annual fee is higher than most secured cards and its minimum and maximum deposits are fairly standard and $300 and $2,000.
Primor Secured Visa® Gold Card
APR: 9.99%, variable
Rewards: N/A
Security Deposit: $200 - $5,000
Fees: $49 annual fee
The APR on the Primor Secured Visa® Gold Card is even lower at 9.99%. However its $49 annual fee is among the highest of any secured card. Primor offers a secured card with a $39 annual fee, but the APR is 13.99%. Primor will also get you for late and returned payments with stiff fees, but, amazingly, there is no penalty APR for late payments. Primor does not check your credit report, so it can be very appealing to people with poor or no credit. The problem is the low APR may be too appealing, inviting people who shouldn’t carry balances on their card to do so. The minimum and maximum deposits are $200 and $5,000 and deposits are treated as savings, earning interest but with no compounding.
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