It’s not easy to repair damaged credit after a series of missed payments or bankruptcy, but with the help of a secured credit card, it is possible. And while secured credit cards sometimes have a bad reputation for having heavy fees and high interest rates (which can exacerbate debt), the right card can help you build your credit history.
When choosing a secured credit card, it is important to pay attention to fees, and verify that your payment history will be reported to the credit bureaus. Prepaid cards function similarly to debit cards – therefore, your usage of a prepaid card is not reported to the bureaus, doing nothing to improve your credit.
How Secured Credit Cards Work
When you open a secured credit card, you’re required to put down a security deposit that’s held in a separate account. In the event that you don’t pay the balance on your card, the deposit is used to pay off the amount owed. The amount of the security deposit varies depending on the card, but it’s usually the same as the card’s available credit limit.
For instance, if your credit limit on the card is $500, your security deposit would likely be $500. That said, if you want to increase your credit limit, many secured credit cards allow you to deposit additional funds into the security account. Also, many cards automatically increase your credit limit over time as you develop a positive credit history.
Aside from the required security deposit, secured credit cards function like any other card. You receive a billing statement each month that you’re responsible for paying, and these payments are reported to the credit bureaus. By paying the bill in good faith each month, you rebuild or establish credit – but failure to make timely payments results in negative credit history.
The following credit cards are the best secured credit cards for building and reestablishing credit.
Top Secured Credit Cards
Minimal Fees; Credit Limit Increases Without Additional Deposits
The Capital One Secured MasterCard is one of the only secured credit cards that does not charge a foreign transaction fee. Furthermore, the Capital One Secured MasterCard is one of the best secured cards because it has few fees and gives you the ability to easily qualify for credit limit increases. These increases don’t require additional deposits as long as payments are on time and you stay within established credit limits.
- How the Card Works. After approval, you have 80 days to make a refundable deposit of $49, $99, or $200, depending on your creditworthiness. After making the deposit, you’re issued a card with a limit of at least $200. You may increase your line of credit by making deposits to the card online or over the phone in $20 increments, up to $3,000. Each dollar deposited adds a dollar to your existing credit limit, but you may also qualify for credit limit increases based on your payment history and creditworthiness.
- Fees. The annual fee for the Capital One Secured MasterCard is $29. There is no balance transfer fee. Late payment fees are up to $19, and returned payment fees are up to $35. There is no over-limit fee or foreign transaction fee.
- APR. The APR is 22.9% for purchases and balance transfers. The APR varies with the prime rate. There is no penalty APR for late payments.
- Other Benefits. The Capital One Secured MasterCard looks like a regular credit card, but you can customize the card with an image of your choice. You also have free access to CreditInform, which includes unlimited access to Monthly Score (which enables you to track your credit score), as well as other credit tools and resources that help you manage your credit and protect yourself from identity theft.
Earn Interest on Your Security Deposit; Graduate to an Unsecured Credit Card
The U.S. Bank Secured Visa is a low-fee secured credit card that gives you the chance to qualify for an unsecured card after 12 months of responsible card use. Additionally, the security deposit made to the U.S. Bank Secured Visa is held in an interest-earning savings account.
- How the Card Works. Your initial deposit is used to open an interest-earning U.S. Bank savings account. The amount of your deposit is equal to the credit limit on your credit card, ranging from $300 to $5,000. You can fund your card through a checking or savings account. After responsibly managing your account for 12 months, you may be offered an unsecured credit card.
- Fees. The annual fee for the U.S. Bank Secured Visa card is $35. There’s an introductory balance transfer fee of 3% or $5, whichever is greater, when you transfer a balance on your application. After that, the fee increases to 4% or $5, whichever is greater. The foreign transaction fee is 2% of purchases made in U.S. dollars, or 3% of purchases made in a foreign currency. The late payment and returned payment fees are up to $35.
- APR. The APR is 20.99% for purchases and balance transfers, an amount that varies with the prime rate. There is no penalty APR.
- Other Benefits. The U.S. Bank Secured Visa credit card does not include any extra benefits; however, it’s the only secured card that enables you to earn interest on your security deposit.
Low APR; Credit Limit Increases Without Additional Deposits
The Merrick Bank Secured Visa offers one of the lowest APRs of all secured credit cards, as well as the opportunity to earn credit limit increases without depositing more money or paying additional fees. As long as you make your payments on time and stay within your credit limit, you may eventually be eligible for an unsecured card. Although it’s not a well-known credit card, the Merrick Bank Secured Visa offers a lower APR and foreign transaction fee than the BankAmericard and Wells Fargo secured credit cards.
- How the Card Works. Your credit limit is equal to the amount of your security deposit – an amount between $200 and $3,000. The annual fee of $36 is deducted from the amount of credit initially available. For example, if you make a security deposit of $200, after your annual fee is deducted from your deposit, your credit limit is $164. Your account is reviewed periodically, and you may qualify for credit limit increases without any additional payments or fees.
- Fees. The annual fee is $36. Balances cannot be transferred to the Merrick Bank Secured Visa. The foreign transaction fee is 2%, and the late payment fee, over-limit fee, and returned payment fee are each up to $35.
- APR. The APR on purchases is 17.45%, an amount that varies with the prime rate. There’s no penalty APR, and you cannot transfer balances to this credit card.
- Other Benefits. Merrick Bank provides access to The Money Smart Financial Education Center, which includes helpful resources for saving money, buying a home, and improving your credit score. This includes tips for using your credit card and establishing a positive credit history.
Low Fees; Low APR; Receive a Refund of the Deposit and Transfer to an Unsecured Card
The Wells Fargo Secured card carries a lower annual fee and APR than most other secured cards. Your deposit is held in a collateral account, which doesn’t earn interest, but does enable you to receive a refund of your deposit and a transfer to an unsecured credit card after positive performance with the secured card.
- How the Card Works. Your credit limit ranges from $300 to $10,000, depending on how much you deposit. Your deposit is transferred into a collateral account, where your funds are held to ensure that your credit card balance is paid. Your account is reviewed periodically, and with positive credit history, you may become eligible for an unsecured credit card and a refund of your deposit.
- Fees. The Wells Fargo Secured credit card has an annual fee of $25. Balance transfers are 5% or $5, whichever is greater. The foreign transaction fee is 3%, and the late payment fee and the returned payment fee are each up to $35.
- APR. The APR is 18.99% for purchases and balance transfers, and varies with the prime rate. There is no penalty APR.
- Other Benefits. The Wells Fargo Secured card also includes free online credit education courses and tips for managing credit. There are also tools available (such as My Spending Report and Budget Watch) that help you track your finances.
Use the Card Without a Deposit After 12 Months
The BankAmericard Secured credit card fees and APR are fairly standard among secured credit cards, but this card does feature the added benefit of building and repairing your credit with one of the nation’s top financial institutions. This is particularly beneficial if you’re a Bank of America customer who prefers to work with one bank. This card also offers you the opportunity to receive a security deposit refund after 12 months, allowing you to continue to use the card as a standard unsecured credit card.
- How the Card Works. New cardholders are given a credit limit ranging from $300 to $4,900, depending on income information and security deposit. In other words, your credit limit could be approved at an amount greater than your deposit. After 12 months, you may qualify to have your security deposit refunded while you continue to use your credit card as an unsecured card.
- Fees. The annual fee for the BankAmericard Secured card is $39. Balance transfers are 3% or $10, whichever is greater. The foreign transaction fee is 3%. The late payment fee is up to $35, and the returned payment fee is up to $25.
- APR. The APR is 20.24% for purchases and balance transfers, an amount that varies with the prime rate. There is a penalty APR of up to 29.99% if you make a late payment.
- Other Benefits. The BankAmericard Secured credit card includes access to credit education on budgeting and wise credit card usage.
Tips for Choosing a Secured Credit Card
Rebuilding your credit history when you have bad credit can be frustrating. You can’t get a credit card without a decent credit score, and conversely, you can’t improve your score without opening new accounts. The credit card industry markets many cards to people with bad credit, and to people trying to rebuild their credit. Some predatory banks try to take advantage of consumers desperate to obtain credit cards. Because of this, consumers must exercise caution when shopping for a card in the sub-prime market.
If you want to get back on your feet after a credit disaster, keep the following things in mind as you search for a credit card:
1. Stick with a Reputable Bank
Don’t fall prey to prestigious-sounding institutions that offer gold or platinum-colored cards. Many disreputable companies in the credit card industry boast impressive sounding names and credit cards. Instead, apply for a credit card from one of the major banks.
2. Look Out for Fee Traps
Predatory banks bury worrisome details about their credit card offerings in the fine print. Review all the terms and conditions for offers before applying for credit cards. Things to avoid include monthly maintenance fees, high interest rates, application fees, and account set-up fees.
3. Rebuild Your Credit
When you have bad credit, apply for a credit card to restore your credit worthiness. Look for a card that reports your payments to all three major credit bureaus. Once you receive your card, pay your balances in full and on time each month. Failing to make payments on time will negatively impact your credit report.
4. Make Sure You Have a Grace Period
Do not apply for any card that does not offer a grace period. The grace period is the amount of time between your statement closing date and your payment due date. You can avoid paying interest on the card when you pay your entire balance before the due date. Without a grace period, you owe interest on every purchase made, making it difficult to improve your credit score.
5. Avoid Annual Fees
Most secured cards have annual fees, but some companies do not charge annual fees for the first year. Avoid credit cards with hefty annual fees, a sure sign the secured cards are just a predatory bank’s products.
6. Don’t Chase Credit Card Rewards
People with good credit can apply for rewards credit cards. If you do not have good credit, however, and cannot apply for the best cash back rewards cards, consider this a blessing in disguise. Until you can improve your credit history, you don’t need any incentives to spend more money.
7. Consider Credit Card Benefits
Credit cards offer fantastic benefits only available to credit cardholders. By law, you receive protection from fraudulent charges when using a credit card. You can also issue a credit card chargeback if you do not receive the goods or services that you paid for with your card. In addition, a secured card may offer valuable services like rental car insurance.
8. Earn Interest on Your Deposit
Secured card companies typically require that customers deposit funds with the company, in order to activate the cards. Some secured credit cards allow users to accrue interest on their deposits. If you use a secured card, take advantage of this valuable feature.
9. Card Application Acceptance
Making a security deposit does not guarantee acceptance of your secured card application. Bank of America and Wells Fargo require that applicants have not declared bankruptcy for one year, and Wells Fargo also requires that applicants do not have any unsettled liens. Capital One takes into account an applicant’s ability to pay, while Orchard/HSBC approves every application, once they confirm the identity of the applicant.
Choosing a secured credit card may seem like a complicated process, but it’s much easier than you think. The most important factors to consider are the cost of the card and its fees, the APR, and whether payments are reported to all three credit bureaus.
If you already have an account with a bank that offers secured credit cards, you may want to check with them to see what they have to offer. Once you’ve opened an account, you just need to make your payments on time and stay within your credit limit. Before you know it, you’ll be well on your way to establishing a positive credit history.
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Editorial Note: The editorial content on this page is not provided by any bank, credit card issuer, airline, or hotel chain, and has not been reviewed, approved, or otherwise endorsed by any of these entities. Opinions expressed here are the author's alone, not those of the bank, credit card issuer, airline, or hotel chain, and have not been reviewed, approved, or otherwise endorsed by any of these entities.